FIM TB T NG H P

Chapter 1
1. The exchange of goods and services is made more efficient by:
A. barters.
B. money.
C. governments.
D. some combination of government transfer and barter.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 1.2 Explain the functions of a modern financial system and categorise the main types of financial institutions, including
depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
Section: Introduction
2. The term ‘medium of exchange' for money refers to its use as:
A. coinage.
B. currency.
C. something that is widely accepted as payment for goods and services.
D. any standard of value that prices can be expressed in.
AACSB: Reflective Thinking
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. The role of money as a store of value refers to:
A. the value of money falling only when the money supply falls.
B. the value of money falling only when the money supply increases.
C. the fact that money allows worth to be stored readily.
D. the fact that money never loses its value compared with other assets.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
4. Money increases economic growth by assisting transfers from:
A. consumers to investors.
B. savers to borrowers.
C. businesses to consumers.
D. borrowers to investors.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
5. 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 value
B. A medium of exchange for settling economic transactions
C. A claim to future cash flows
D. Short-term protection against inflation
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
6. Buyers of financial claims lend their excess funds because they:
A. expect to borrow extra funds in the future.

B. want surplus funds in the future.
C. want to invest in the future.
D. want to increase their costs relative to their incomes.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
7. Sellers of financial claims promise to pay back borrowed funds:
A. by borrowing extra funds in the future.

B. based on their expectation of having surplus funds in the future.
C. by selling other assets.
D. by reducing their costs relative to their incomes.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
8. A savings-surplus unit is an entity:
A. that needs to borrow funds from a surplus unit.

B. which has an income that exceeds its spending.
C. whose spending exceeds its income.
D. called a company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. 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 wants'.

B. greatly reduces the probability of inflation.
C. increases the rate of economic growth of a country.
D. occurs only through financial intermediaries.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. Both real and financial assets have four principal attributes that are significant factors in
the investment decision process. These are:
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
AACSB: Reflective thinking
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Section: 1.2 The financial system and financial institutions
11. Which of the following is NOT associated with characteristics of shares?
A. Part ownership of a company

B. Capital gains
C. A fixed interest payment
D. Dividends
AACSB: Diversity
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
Learning Objective: 1.3 Define the main classes of financial instruments that are issued into the financial system, that is, equity, debt, hybrids
and derivatives.
12. A financial institution that obtains most of its funds from deposits is a/an:
A. investment bank.
B. unit trust.
C. commercial bank.
D. general insurer.
AACSB: Reflective thinking
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
13. Institutions that specialise in off-balance-sheet advisory services are called:
A. depository financial institutions.

B. contractual institutions.
C. finance companies.
D. investment banks.
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
14. A financial intermediary that receives premium payments which are used to purchase
assets to cover future possible payments is a:
A. building society.
B. credit union.
C. savings bank.
D. life insurance office.
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
15. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. Financial institutions that raise the majority of their funds by selling securities in the
money markets are:
A. commercial banks.
B. building societies.
C. finance companies.
D. life insurance offices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
17. Financial institutions that are formed under a trust deed and attract funds by inviting the
public to buy units are:
A. finance companies
B. building societies.
C. unit trusts.
D. life insurance offices.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
18. Which of the following is NOT a term associated with shares?
A. Residual
B. Ownership
C. Voting rights
D. Contractual claim
Difficulty: Easy
Est time: <1 minute
and derivatives.
Section: 1.3 Financial instruments
19. Which of the following is NOT a characteristic commonly associated with preference
shares?
A. A specified, fixed return

B. No voting rights
C. Higher ranking than bond holders on claims on assets
D. No entitlement to take possession of assets if the borrower defaults on payment
Difficulty: Easy
Est time: <1 minute
and derivatives.
20. Long-term debt financing instruments used by companies are called:
A. bills.
B. debentures.
C. shares.
D. equities.
Difficulty: Easy
Est time: <1 minute
and derivatives.
21. When a borrower issues a debt instrument with collateral specified in its contract this debt
instrument is called:
A. unsecured.
B. secured.
C. defined.
D. negotiable.
Difficulty: Easy
Est time: <1 minute
and derivatives.
22. Debt instruments that can be easily sold and transferred in the financial markets are
called:
A. negotiable.
B. secured.
C. unsecured.
D. discounted.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
and derivatives.
23. Which of the following is NOT a feature of a debt instrument?
A. A contractual claim against the borrower

B. Periodic interest payments
C. Higher claim on assets of borrower than equity holders
D. Their prices do not fluctuate as much as shares
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
and derivatives.
24. Which of the following is NOT a feature of futures contracts?
A. Futures contracts involve an obligation to buy or sell a specified amount

B. Trading of contracts occurs on an exchange
C. The contract price is settled at the end of the contract
D. Trading an opposite contract usually closes out the contract
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
and derivatives.
25. Which of the following is NOT a feature of forward contracts?
A. Forward contracts are not standardised

B. Forward contracts do not trade on organised exchanges
C. The contract price may be settled at the end of the contract
D. Forward contracts are closed out by trading an opposite contract
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
and derivatives.
26. Which of the following is NOT a feature of option contracts?
A. The buyer does not have an obligation to proceed with the contract
B. The writer of the contract receives a fee
C. The price of the designated asset is determined at the beginning of the contract
D. The right to buy is called a put option
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
and derivatives.
27. Which of the following is NOT a feature of swaps?
A. There is a contractual arrangement to exchange cash flows

B. Interest rate swaps exchange principal at the beginning and the end
C. A fixed rate obligation may be exchanged for a variable rate obligation
D. A swap can involve interest payments and currencies
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
and derivatives.
28. The key reason for the existence of markets of financial assets is:
A. that holders of shares generally want to exchange them for bonds and other financial
instruments.
B. the high expenditure for many individuals and businesses.
C. that the lack of money in an economy makes trade in financial assets necessary.
D. the refusal of most modern governments to print money on demand.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.4 Discuss the nature of the flow of funds between savers and borrowers, including primary markets, secondary markets,
direct finance and intermediated finance.
Section: 1.4 Financial markets
29. Financial markets:
A. facilitate the exchange of financial assets.

B. provide information about prices of financial assets.
C. provide a channel for funds to flow between the providers and users of funds.
D. all of the given choices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. The most important function of a financial market is to:
A. provide information about shares.

B. provide a market for shares.
C. facilitate the flow of funds between lenders and borrowers.
D. provide employment for brokers and agents.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
A. act as intermediaries by holding a collection of assets and issuing claims based on

them to savers.
B. issue claims on future cash flows of individual borrowers directly to lenders.
C. transmit funds indirectly between lenders and borrowers.
D. usually provide lenders with lower returns than other financial intermediaries.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
32. A primary financial market is one that:
A. offers financial assets with the highest expected return.

B. offers the greatest number of financial assets.
C. involves the sale of financial assets for the first time.
D. offers financial assets with the highest historical return.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. A secondary financial market is one that:
A. offers financial assets with the highest expected return.

B. offers the greatest number of financial assets.
C. involves the sale of existing financial assets.
D. offers financial assets with the highest historical return.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
34. Purchasing shares on the Australian Securities Exchange is an example of:
A. a primary market transaction.

B. companies raising finance from another financial intermediary.
C. companies raising new finance.
D. a secondary market transaction.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. When a security is sold in the financial markets for the first time:
A. funds flow from the saver to the issuer.

B. funds flow from the borrower to the saver.
C. it represents a secondary transaction to the underwriter.
D. it is an asset for the borrower.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
36. Which of the following is NOT an example of primary market transactions?
A. A company issue of shares to raise funds for an investment project

B. A government issue of bonds
C. A mortgage bond
D. A mortgage loan to buy a house
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
37. A ‘primary market' is a market:
A. only for equity issues by major or ‘primary' companies.

B. where borrowers sell new financial instruments to buyers.
C. where savers sell new financial claims to borrowers.
D. where government securities are bought and sold.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
38. Buying bonds in the capital markets is an example of:
A. a secondary market transaction.

B. a primary market transaction.
C. companies raising new funds.
D. companies raising funds from a secondary source.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. The market where existing securities are sold is the:
A. economic market.
B. primary market.
C. secondary market.
D. financial market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. When a large company issues a financial instrument into the financial markets:
A. funds flow indirectly from saver to borrower.

B. the cost of funds is generally higher owing to the risk involved.
C. it buys a financial claim.
D. it sells a financial claim.
Difficulty: Easy
Est time: <1 minute
41. Secondary markets:
A. allow borrowers to raise long-term funds.

B. facilitate capital-raising in the primary market.
C. do not raise new funds but offer liquidity.
D. all of the given answers.
Difficulty: Medium
Est time: <1 minute
42. The flow of funds through financial markets increases the volume of savings and
investment by:
A. maintaining low interest rates.

B. storing large quantities of cash.
C. providing savers with a variety of ways to lend to borrowers.
D. offering lower interest rates than could be obtained directly from borrowers.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
43. Which of the following statements is NOT a feature of financial markets?
A. Financial markets generally provide borrowers with lower cost funds than through a
financial intermediary.
B. Funds are channelled directly from savers to borrowers.
C. Contractual agreements are issued between savers and borrowers.
D. Financial markets generally deal only with the purchase and sale of government
securities.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
44. Which of the following is NOT true—a well-functioning financial market:
A. has a steadily increasing liquidity for most assets.

B. offers increased ease of restructuring portfolios of assets.
C. has a quick assimilation of information into asset prices.
D. has a selection of financial assets with similar timings of cash flow.
Difficulty: Hard
Est time: <1 minute
A. act as intermediaries between borrowers and savers.

B. directly issue claims on savers to borrowers.
C. involve the buying and selling of existing financial securities only.
D. involve both primary and secondary transactions.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
46. Direct financing allows a borrower to:
A. easily assess a lender's level of default risk.

B. match amounts and maturity of investments with borrowers.
C. lower search and transaction costs.
D. diversify their funding sources.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
47. Which of the following is NOT a possible disadvantage of direct financing?
A. Matching amounts of funds to be borrowed with those to be lent

B. Assessment of the risk of the borrower
C. Cost of preparing legal contracts, taxation and accounting advice
D. Cost of the financial intermediary involved
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
48. An issue of debentures is an example of:
A. a secondary market transaction.

B. fundraising through financial intermediaries.
C. a direct form of funding.
D. an indirect form of funding.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
49. An example of an indirect form of funding is a/an:
A. issue of debentures.
B. issue of unsecured notes.
C. term loan.
D. issue of shares.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
50. Which of the following is NOT a major advantage of direct finance?
A. Direct finance reduces financial institution' fees.

B. Direct finance allows borrowers to diversify sources of funds.
C. Direct finance allows greater flexibility in funding types.
D. Direct finance reduces search and transactions costs.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
51. Financial intermediaries:
A. act as a third party by holding a portfolio of assets and issuing claims based on them to
savers.
B. issue claims on future cash flows of individual borrowers directly to lenders.
C. transmit funds directly between lenders and borrowers.
D. usually provide lenders with lower returns than other financial institutions.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
52. The flow of funds between lenders and borrowers is channelled:
A. indirectly through financial markets.

B. directly through financial intermediaries.
C. indirectly through financial intermediaries.
D. mainly through government agencies.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. ‘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 transformation
B. Maturity transformation
C. Credit risk transformation
D. Denomination transformation
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
54. The main role of financial intermediaries is to:
A. borrow funds from surplus units and lend them to borrowers.

B. provide advice to consumers on their finances.
C. provide funds for the government to cover budget deficits.
D. help ensure there are enough funds in circulation in a country.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
55. Financial intermediaries pool the funds of:
A. many small savers and make loans to a few large borrowers.

B. a few savers and make loans to many borrowers.
C. many small savers and make loans to many borrowers.
D. a few large savers and make loans to a few large borrowers.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
56. Small savers prefer to use financial intermediaries rather than lending directly to
borrowers because:
A. financial intermediaries offer the savers a wide portfolio of financial instruments.

B. financial intermediaries offer much higher interest rates than can be obtained directly
from borrowers.
C. borrowers dislike dealing with savers.
D. savers have a claim with the ultimate borrower via the financial intermediary.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
57. Financial intermediaries can engage in credit risk transformation because they:
A. obtain cost advantages owing to their size and business volumes transacted.
B. can quickly convert financial assets into cash, close to the current market price.
C. develop expertise in lending and diversifying loans.
D. can pool savers' short-term deposits and make long-term loans.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
58. When a financial intermediary collects together deposits and lends them out as loans to
companies, it is engaging in:
A. liability management.
B. liquidity management.
C. credit transformation.
D. asset transformation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
59. ‘Liquidity’ in financial terms is
A. a feature of money only.

B. the ease with which an asset can be sold at the published market price.
C. the best measure of risk of a financial asset.
D. to lower the rate of return for an asset.
Bloom's: Application
Difficulty: Easy
Est time: <1 minute
60. When an individual has immediate access to their funds from an account with a financial
intermediary, the intermediary is engaging in:
A. asset transformation.
B. liability management.
C. liquidity management.
D. credit transformation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. When a financial intermediary can repeatedly use standardised documents, it is engaging
in:
A. liability management.
B. liquidity management.
C. credit transformation.
D. economies of scale.
Difficulty: Easy
Est time: <1 minute
62. According to the textbook, all of the following are financial intermediaries except a/an:
A. bank.
B. insurance company.
C. superannuation fund.
D. share broking firm.
Difficulty: Easy
Est time: <1 minute
63. An example of a financial intermediary is:
A. a stockbroker.
B. the Australian Securities Exchange.
C. the Australian Securities Commission.
D. an insurance company.
Difficulty: Easy
Est time: <1 minute
64. 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; suppliers
B. users; providers
C. suppliers; users
D. demanders; providers
Difficulty: Easy
Est time: <1 minute
Section: 1.5 Flow of funds, market relationships and stability
65. Which of the following borrowers would pay the lowest interest rate on debts of equal
maturity?
A. The National Bank of Australia

B. Telstra
C. The City of Sydney
D. The Commonwealth Government
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
66. Generally, in the long term, a government:
A. is a net borrower of funds.

B. is a net supplier of funds.
C. borrows funds directly from households.
D. borrows funds directly from the financial market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
67. The _______ is created by a financial connection between providers and users of short-
term funds.
A. share market
B. capital market
C. money market
D. financial market
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. Which of the following is NOT usually a short-term discount security?
A. Negotiable certificates of deposit

B. Commercial paper
C. Bank bills
D. Unsecured notes
Difficulty: Medium
Est time: <1 minute
69. Which of the following is NOT a feature of the money market?
A. It is a mainly wholesale market

B. It deals with short-term financial claims
C. It is important in financing the working-capital needs of businesses and governments
D. It only operates as a market in which new security issues are created and marketed
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. The market that involves the buying and selling of short-term securities is the:
A. securities market.
B. money market.
C. share market.
D. capital market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. A large company with a temporary surplus of funds is most likely to buy:
A. bank bills.
B. convertible notes.
C. debentures.
D. shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. A company that issues promissory notes into the short-term debt markets is conducting a
transaction in the:
A. commercial paper market.

B. inter-bank market.
C. bills market.
D. official short-term money market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. A company with a high credit rating can issue _____ directly into the money markets.
A. CDs
B. Commercial paper
C. unsecured notes
D. debentures
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
74. The market that generally involves the buying and selling of discount securities is the:
A. securities market.
B. money market.
C. share market.
D. capital market.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
75. A source of short-term liquidity funding for banks is the issue of:
A. bank bills.
B. debentures.
C. certificates of deposit.
D. commercial paper.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. The market that includes individuals, companies and governments in the buying and
selling of long-term debt and equity securities is the:
A. currency market.
B. debt market.
C. capital market.
D. financial market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
77. When a company issues a long-term debt instrument with no security attached it is selling
_____ to investors.
A. shares
B. debentures
C. unsecured notes
D. term loans
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
78. From the viewpoint of a corporation, which source of long-term funding does not have to
be repaid?
A. Equity
B. Commercial paper
C. Corporate bonds
D. Bank bills
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
79. For additional funding, a company decides to issue $15 million in corporate bonds. The
securities will be issued into the:
A. retail markets.
B. secondary markets.
C. money markets.
D. capital markets.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
80. The major financial assets traded in the capital market are:
A. bank bills and commercial paper.

B. Treasury notes and certificates of deposits.
C. bonds and convertible securities.
D. shares and bonds.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
81. Compared with Treasury bonds, Treasury notes generally:
A. have a longer maturity.

B. pay interest annually.
C. are issued in the capital markets.
D. are discount securities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
82. If you purchase an Australian government bond, that bond is:
A. an asset to you but a liability for the Australian government.

B. an asset to you as well as an asset for the Australian government.
C. a liability to you but an asset for the Australian government.
D. a liability to you as well as a liability for the Australian government.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
and derivatives.
83. When government borrowing reduces the amount of funds available for lending to
businesses, this is called:
A. credit rationing.
B. crowding out.
C. capital rationing.
D. government quotas.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.6 Analyse the flow of funds through the financial system and the economy and briefly discuss the importance of 'stability'
in relation to the flow of funds.
84. All of the following are key financial services provided by the financial system except:
A. liquidity.
B. risk transfer.
C. profitability.
D. information.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
85. Which of the following would be most likely to use financial markets to borrow?
A. A household with a small amount saved

B. A small business wanting to borrow to buy some machinery
C. A government authority wanting to borrow to finance highway construction
D. A company with a poor credit rating
Difficulty: Easy
Est time: <1 minute
86. Generally, financial instruments are divided into three broad categories of equity, debt and
derivatives. Which of the following are usually issued by a company to raise new funds?
i. Unsecured notes
ii. Ordinary shares
iii. Debentures
iv. Bills of exchange
v. Futures contracts
vi. Preference shares
A. ii, iii, iv, v

B. ii, iv, v, vi
C. i, ii, iii, iv
D. i, ii, iv, v
Difficulty: Medium
Est time: <1 minute
and derivatives.
87. The movement of funds between the four sectors of a domestic economy and the rest of
the world is called:
A. flow of funds.
B. sector analysis.
C. sectorial flows.
D. cross-sector flows.
Difficulty: Medium
Est time: <1 minute
88. As a broad generalisation, in the sectorial flow of funds households are typically:
A. a deficit sector.
B. a surplus sector.
C. fluctuates between a deficit sector and a neutral sector.
D. borrowers.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
89. The flow of funds between the sectors of a nation-state:
A. varies from year to year.

B. depends on the business cycle.
C. depends on the levels of economic activity.
D. relates to all of the given answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. Money allows economic and financial transactions to be carried out more efficiently than
bartering.
TRUE
Bartering generally involves high search costs.
Difficulty: Easy
Est time: <1 minute
91. Four main attributes of an asset are return, risk, volatility and time-pattern of cash flows.
FALSE
The attributes are return, risk, liquidity and time-pattern.
Difficulty: Easy
Est time: <1 minute
92. Deficit entities purchase financial instruments that offer the lowest interest rate.
FALSE
Deficit entities sell financial instruments.
Difficulty: Easy
Est time: <1 minute
93. Individuals may be categorised as risk averse, risk neutral or risk takers. Risk averse
individuals will accept a lower rate of return so as to reduce their risk exposure.
TRUE
An investor who prefers an investment with less risk to another with more risk, provided
they offer the same expected return, is risk averse.
Difficulty: Easy
Est time: <1 minute
94. A well-functioning financial system enables participants to readily change the
composition of their financial assets portfolio.
TRUE
With liquid markets and financial intermediaries, investors are able to change their
portfolios.
Difficulty: Easy
Est time: <1 minute
95.
Monetary policy relates to actions of a central bank to control the amount of money for
transactions in an economy.
FALSE
From the early days of banking it was recognised that there needed to be control over the
money supply. A country's central bank was usually assigned this task.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. The government organisation responsible for the conduct of monetary policy is the
prudential supervisor of a country's banks.
FALSE
Generally, the task of monetary policy is assigned to a central bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. Investment banks are contractual organisations that make up contracts for their corporate
clients and governments.
FALSE
Investment banks generally focus on provision of advisory services for corporate and
government clients.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. In recent years, depository financial institutions have obtained a large proportion of their
funds from the financial markets directly.
FALSE
For the major financial intermediaries (the banks) the bulk of their funds are still obtained
from deposits.

Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
99. A stock is a debt security that promises to make specified interest payments.
FALSE
A stock is a share that promises to pay dividends.
Difficulty: Easy
Est time: <1 minute
and derivatives.
100. Margin trading is the sale of a financial product that the seller does not own and who
intends to buy back at a lower price later.
FALSE
Short selling is the sale of a financial product that the seller does not own.

Difficulty: Medium
Est time: <1 minute
101. Explain how the properties of money facilitated the evolution of a modern financial
system.
As a medium of exchange, money makes markets in goods and services more efficient. If
goods and services are exchanged only for other goods and services as in the case of
barter, there are considerable transaction costs. When transaction costs are low,
individuals can find it easier to specialise in the production of goods and services. This
can lead to a more active and productive economy. As a store of value, money makes it
easier for individuals to save their surplus earnings. It is also more readily divisible than
physical goods so that it can be appropriately apportioned according to the size of the
transaction. Consequently, an efficient flow of funds between savers and users of funds is
a part of a modern financial system.
Bloom's: Knowledge
Difficulty: Hard
Est time: 1-3 minutes
102. What is monetary policy and who is responsible for its implementation?
Monetary policy is the use of interest rates to control inflation, usually in a specified
range, and to promote economic growth. A central bank is usually responsible for carrying
out monetary policy.
Bloom's: Knowledge
Difficulty: Medium
103. Explain what a debt security is. What are some common types of debt securities?
A debt security represents a contractual claim against the issuer of the instrument who has
borrowed the funds. The borrower agrees to abide by the terms of the contract such as
meeting covenants. A major part of the contract is the terms of payment to the lender.
Corporations issue debt securities such as debentures, term loans, commercial bills,
promissory notes and unsecured notes.

Bloom's: Synthesis
Difficulty: Medium
and derivatives.
104. Identify and explain briefly the types of derivatives in a financial system.
There are four basic types of derivative contracts.

1. A futures contract is a contract to buy (or sell) a specified amount of a commodity or
financial instrument at a price determined today for delivery or payment at a future
specified date.
2. A forward contract has features similar to a futures contract but is generally more
flexible as it is negotiated with a bank or investment bank.
3. An option gives the buyer the right but not the obligation to buy (or sell) a certain asset
before or at a specified date at a predetermined price.
4. A swap contract is an arrangement to exchange specified future cash flows. With an
interest rate swap, there is an exchange of future cash flows, such as one based on a
floating interest rate and the other on a fixed interest rate on a notional principal.

Bloom's: Synthesis
Difficulty: Hard
and derivatives.
105. The capital markets provide the opportunity for large corporations to manage their long-
term cash flows. Discuss this statement using the example of a surplus entity and a deficit
entity.
The debt part of capital markets consists of a range of instruments. Large creditworthy
companies seeking funds can issue long-term securities such as bonds or unsecured notes
directly into capital markets. Organisations such as superannuation funds or insurance
companies with funds to invest can buy these instruments for part of their portfolio.
Chapter 2
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

markets.
B. reduce the excess profits of banks.
C. reduce the discrimination against banks owing to direct controls on them only.
D. provide reduced control on the money supply.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.1 Evaluate the functions and activities of commercial banks within the financial system.
2.
The changes to the regulations for the banking industry under deregulation in the
mid-1980s have resulted in _______ the growth of bank sector.
A. decreasing
B. increasing
C. not altering
D. dramatically decreasing
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Which of the following statements concerning banks is incorrect?
A. In Australia, banks currently account for the largest share of assets of all
financial institutions.
B. Bank loans and commitments must be supported by a minimum specified
amount of capital.
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.
Blooms: Comprehension
Difficulty: Easy
Est time: <1 minute
4. Unlike most other businesses, a bank's balance sheet is made up mainly of:
A. real assets and financial liabilities.

B. real liabilities and financial liabilities.
C. real assets and real liabilities.
D. financial assets and liabilities.
Difficulty: Easy
Est time: <1 minute
5. The level of banks' share of assets of all Australian financial institutions from the
1950s onwards first _______, then in the 1980s _______ and recently has _______
owing to banks forming consolidated corporate entities.
A. increased; decreased; increased

B. increased; decreased; remained stable
C. decreased; increased; decreased
D. decreased; increased; remained stable
AACSB: Multicultural/Diverse
Blooms: Evaluation
Difficulty: Hard
Est time: <1 minute
6. The market structure of the banking sector has changed since deregulation of the
financial system during the 1980s. Which statement most closely reflects the
current structure of the banking sector in Australia?
A. Foreign banks dominate in number and share of total assets.

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.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
7. Which of the following features is a role of a bank?
A. Attracting funds from the capital markets to facilitate borrowing by the

household sector
B. Facilitating the flow of funds from borrowers to lenders
C. Facilitating the flow of funds from savers to borrowers
D. Managing the level of interest rates
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
8. 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 central bank standards.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
Section: 2.1 The main activities of commercial banking
9. For banks, asset management refers to:
A. managing the assets of the banks; that is, their deposits.

B. managing the real assets, the bank buildings.
C. managing the loans portfolio.
D. protecting the deposits by using derivatives.
Blooms: Evaluation
Difficulty: Easy
Est time: <1 minute
10. For banks, liability management refers to:
A. managing the liabilities of the banks; that is, the loans.

B. banks ensuring they have sufficient funds by managing their deposit base.
C. managing the real assets, the bank buildings.
D. protecting the loans and other commitments by using derivatives.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When a bank raises funds in the international markets to fund new lending growth,
it is involved in:
A. asset management.
B. off-balance-sheet business.
C. liability management.
D. derivative management.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
12. Off-balance-sheet business for a bank refers to:
A. a bank's income.
B. a bank's contingent liabilities.
C. assets that will appear on the forthcoming balance sheet.
D. transactions recorded on the previous balance sheet.
Difficulty: Medium
Est time: <1 minute
13. Which of the following about a bank's activities is incorrect?
A. A bank's loans are its assets.

B. Off-balance-sheet business items are contingent liabilities.
C. Liability management is the management of a bank's loans.
D. Banks typically have high credit ratings.
Difficulty: Medium
Est time: <1 minute
14. The assets on a bank's balance sheet are:
A. the sources of funds.

B. the uses of funds.
C. the different types of deposits the bank offers.
D. equal to the liabilities of the banks.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.2 Identify the main sources of funds of commercial banks, including current deposits, demand deposits, term
deposits, negotiable certificates of deposit, bill acceptance liabilities, debt liabilities, foreign currency liabilities and loan capital.
Section: 2.2 Sources of funds
15. The liabilities on a bank's balance sheet are:
A. the sources of funds.

B. the uses of funds.
C. the different types of loans the bank offers.
D. equal to the assets of the banks.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
16. Each of the following balance sheet portfolio items are liabilities of a bank, except:
A. term deposits.
B. bill acceptance facilities.
D. overdrafts.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
17. Each of the following balance sheet portfolio items are sources of funds for a bank,
except:
A. term deposits.
B. bill acceptance facilities.
D. overdrafts.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
18. Which of the following is a bank liability?
A. Consumer loans
B. Lease finance
C. Bills receivable
D. Certificates of deposit
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
19. 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.
Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
20. Which of the following statements about banks' current accounts is incorrect?
A. Current accounts today generally pay interest.

B. Current accounts are a relatively stable source of bank funds.
C. Deregulation had a major impact on current accounts.
D. Current accounts form an increasingly important type of asset for banks.
Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
21. 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.
Blooms: Evaluation
Difficulty: Medium
Est time: <1 minute
22. As a depositor shifts funds from current deposits to term deposits in a bank,
generally the depositor’s:
A. liquidity increases and credit risk increases.

B. liquidity decreases and interest income increases.
C. liquidity decreases and interest income decreases.
D. implicit interest increases and explicit interest decreases.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
23. If a bank required more short-term funding, it would issue:
A. a certificate of deposit.
B. a debenture.
C. an unsecured note.
D. preference shares.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
24. Which of the following is generally a highly liquid instrument?
A. A bank bill
B. A certificate of deposit
C. Neither a bank bill nor a certificate of deposit
D. Both bank bills and certificates of deposit are liquid instruments
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
25. The term ‘negotiable' in relation to a security means:
A. its price can be bargained for when sold.

B. it can be sold easily.
C. its buyer can negotiate its price when buying.
D. it is reasonably illiquid and will drop in price when sold.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
26. 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 because 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.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
27. The advantage of a CD to a bank is/are:
A. its rate of interest may be adjusted quickly.

B. it can be sold quickly in the money market for cash.
C. it is a negotiable instrument.
D. all of the given choices.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
28. 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

liability.
B. a certificate of deposit does not pay interest until maturity.
C. a certificate of deposit is illiquid when compared with a term deposit.
D. a certificate of deposit is a high-credit-risk instrument when compared with a
term deposit.
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
29. Which of the following about CDs is incorrect?
A. CDs are issued directly into the money markets.

B. CDs don't include interest until maturity.
C. CDs are called discount securities.
D. CDs are issued by large, creditworthy companies.
Blooms: Evaluation
Difficulty: Medium
Est time: <1 minute
30. With regard to bank bills, the bill is sold at a discount:
A. because the bank needs to find a buyer.

B. to encourage buyers.
C. because the difference between the initial price and the final sale price is the
return to the holder.
D. because the bank pays the face value of the funds to the borrower at maturity.
Blooms: Evaluation
Difficulty: Hard
Est time: <1 minute
31. With regard to bank bills, the expression ‘the issuer sells the bill at the best
discount’ means the issuer:
A. is providing the funding.

B. is acting as mediator between the borrower and the bank.
C. is selling the bill into the market at the lowest yield.
D. pays the lowest face value of the funds to the holder at maturity.
Blooms: Evaluation
Difficulty: Hard
Est time: <1 minute
32. With regard to bank bills, the actual role of the acceptor is to:
A. provide the initial funding.

B. act as mediator between the borrower and bank.
C. issue the bank bill.
D. pay the face value of the funds to the holder at maturity.
Difficulty: Hard
Est time: <1 minute
33. Which of the following is incorrect in relation to bill financing?
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.
Blooms: Synthesis
Difficulty: Hard
Est time: <1 minute
34. For a bank, an advantage of bill financing is:
A. the bank earns income from accepting bills.

B. the bank doesn't necessarily have to use its own funds.
C. interest rates on bill funding can be adjusted rapidly.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
35. Which of the following statements about bill acceptance facilities is incorrect?
A. When a bank discounts a bill for the issuer, it buys it.

B. When a bank that holds a bill rediscounts it the bank onsells it.
C. When a bank acts as an acceptor it will pay the face value of the bill to the
holder at maturity.
D. If interest rates change before a bank bill matures, the bank can change the
interest rate on it.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
36. Commercial banks take part in the money markets as:
A. lenders of funds only.

B. borrowers of funds only.
C. both lenders and borrowers of funds.
D. underwriters only.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
37. Foreign currency liabilities have increased in importance as a source of funds for
Australian banks. Which of the following statements is NOT a major reason?
i. deregulation of the foreign exchange market
ii. diversification of funding sources
iii. demand from multinational corporate clients
iv. internationalisation of global financial markets
v. avoidance of the non-callable deposit prudential requirement
vi. expansion of banks' asset-base denominated in foreign currencies
A. v
B. ii
C. i
D. All of the given answers are correct.
Blooms: Synthesis
Difficulty: Hard
Est time: <1 minute
38. Alternatives to the usual source of long-term bank funds that have the
characteristics of both debt and equity are called:
A. secured debentures.
B. transferable certificates of deposit.
C. promissory notes.
D. subordinated notes.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
39. The following balance sheet portfolio items are all assets of a bank, except:
A. overdrafts.
B. lease finance.
D. credit card draw-downs.
Difficulty: Medium
Est time: <1 minute
40. A short-term discount security issued by a drawer at a discount, with the promise to
repay the face value at maturity, is called:
A. a commercial paper.
B. a commercial bill.
C. a certificate of deposit.
Difficulty: Medium
Est time: <1 minute
41. Which of the following statements regarding the foreign currency liabilities of a
bank is incorrect?
A. The large international markets are important sources of funds for commercial
banks.
B. Australian banks occasionally issue debt securities into the international markets
to raise sums ranging from $20 million to $50 million.
C. Foreign currency liabilities issued into the euromarkets are typically
denominated in US dollars.
D. After deregulation commercial banks were able to expand their international
funding sources.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
42. All of the following financial securities are considered ‘uses of funds' by banks
except:
A. commercial bills.
B. credit cards.
D. overdrafts.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.3 Identify the main uses of funds by commercial banks, including personal and housing lending, commercial
lending, lending to government, and other bank assets.
Section: 2.3 Uses of funds
43. If you take out a mortgage from a bank, the mortgage is a/an:
A. liability to the bank and an asset to you.

B. liability to you and an asset to the bank.
C. liability to both you and the bank.
D. asset to both you and the bank.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
44. The interest rate BBSW refers to:
A. the reference rate for medium-term funding.

B. a rate calculated each day from the offer rate of the last daily sale in the bank bill
market.
C. the average mid-point of the bid and offer rates in the bank bill market.
D. the bank bill security rate.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
45. Banks invest in government securities because:
A. they offer high yield owing to their risk.

B. they offer a low yield owing to their illiquidity.
C. all government bonds offer protection against inflation risk.
D. they can be used as security against banks' borrowing.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
46. Which of the following statements about commercial lending is incorrect?
A. The term loan is the main type of lending provided by banks to firms.
B. Typically, term loans are for maturities ranging from 5 to 15 years.
C. To extend commercial bill financing a bank may provide the firm with a rollover
facility.
D. Banks can provide flexible funding called an overdraft to firms.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
47. Which of the following about bank lending to government is incorrect?
A. Securities issued by governments are usually regarded as low risk.

B. Banks invest in government securities because they are a source of liquidity.
C. Banks invest in T-notes because they provide short-term income streams.
D. Government securities enable a bank to manage the maturity structure of its
balance sheet.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
48. Off-balance-sheet business for a bank refers to:
A. deposits and loans longer than one year.

B. transactions that are currently only a contingent liability.
C. call deposits that may be withdrawn on demand.
D. consumer loans that are in default.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.4 Outline the nature and importance of banks’ off-balance-sheet business, including direct credit substitutes,
trade- and performance-related items, commitments and market-rate-related contracts.
Section: 2.4 Off-balance-sheet business
49. All of the following are off-balance-sheet transactions of a bank except:
A. documentary letters of credit.

B. performance guarantees.
C. underwriting facilities.
D. bills receivable.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
50. In recent times, there had been a substantial expansion in fee-related income for
banks. What is the principal reason for this?
A. Increased confidence in banks by individual investors

B. Increased off-sheet business (OBS) for banks
C. Reduced guidelines by Australian bank supervisor APRA
D. Increased deposits in banks
Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
51. Which of the following statements is true for off-balance-sheet business for banks?
A. Off-balance-sheet business is a small part of a bank's income.

B. Off-balance-sheet business is recorded on a bank's statement of income and
expense.
C. Off-balance-sheet business represents fee-based income.
D. Off-balance-sheet business records deposits that do not fit on the balance sheet.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
52. Which of the following statements about market-rate-related items such as forward-
rate agreements is incorrect?
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.
Blooms: Synthesis
Difficulty: Hard
Est time: <1 minute
53. Which of the following categories 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
Blooms: Synthesis
Difficulty: Hard
Est time: <1 minute
54. Which of the following categories represents the most significant proportion of total
market-rate-related off-balance-sheet business of the banks?
A. Currency swap agreements

B. Foreign exchange contracts
C. Interest rate swaps
D. Interest rate futures
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
55. 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 facility.
C. providing a short-term, self-liquidating trade contingency.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
56. Which of the following statements about direct credit substitutes provided by a
commercial bank is incorrect?
A. They are provided to support a client's financial obligations.

B. An example of a direct credit substitute is a bank guarantee.
C. The bank provides funding to a third party instead of the client providing the
funding.
D. With a direct credit substitute a bank's client can raise funds directly from the
financial markets.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
57. Off-balance-sheet business is usually divided into four major categories:
A. Direct credit substitutes, trade and performance-related items, commitments and

trade guarantees.
B. Direct credit substitutes, trade and performance-related items, commitments and
market-related transactions.
C. Direct credit substitutes, trade and performance-related items, commitments and
underwriting facilities.
D. Direct credit substitutes, ‘standby letters of credit', commitments and market-
related transactions.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
58. A ‘commitment’ by a bank is:
A. a form of swap.
B. a promise by a large depositor to provide extra funds to the bank.
C. the unused balance on a bank credit card.
D. an undertaking to advance funds or to acquire an asset in the future.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
59. Which of the following is not a commitment by a bank?
A. Outright forward purchase agreement

B. Underwriting facilities
C. Credit card limit approvals unused by cardholder
D. Currency swap
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
60. 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
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.5 Consider the regulation and prudential supervision of banks.
Section: 2.5 Regulation and prudential supervision of commercial banks
61. The Australian institution APRA is responsible for the regulatory supervision of
financial institutions such as banks and credit unions. APRA stands for:
A. Australian Practice and Regulatory Association.

B. Australian Prudential Regulation Authority.
C. Australian Prudential Rule Authority.
D. Australian Practice and Regulatory Authority.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
62. Which of the following institutions are supervised by APRA?
A. Building societies
B. Commercial banks
C. Credit unions
D. All of the given answers
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
63. Within the context of the Corporations Law in Australia, the supervision of
financial market integrity and consumer protection is done by:
A. APRA.
B. ASIC.
C. RBA.
D. ACCC.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
64. The requirement and observation of standards designed to ensure the stability and
soundness of a financial system is called:
A. fiscal policy.
B. monetary policy.
C. prudential supervision.
D. the Basel accord.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 2.6 A background to the capital adequacy standards
65. The Basel capital adequacy requirements apply to:
A. all financial institutions.

B. banks, investment banks and merchant banks only.
C. all financial institutions supervised by ASIC.
D. all banks registered with APRA and some other financial institutions.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 2.6 Understand the background and application of Basel II and Basel III.
Section: 2.6 A background to the capital adequacy standards
66. 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 risk.

B. credit risk, market risk and type of capital held.
C. default risk, interest rate risk and market risk.
D. default risk, liquidity risk and type of capital held.
Blooms: Knowledge
Difficulty: Medium
Est time: <1 minute
Section: 2.7 Basel II capital accord
67. According to the textbook, the Basel II approach to capital adequacy for banks
involves ____ main elements.
A. three
B. four
C. five
D. six
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
68. Which of the following does NOT apply to Tier 1 capital?
A. Tier 1 capital is described as ‘core capital'.

B. Tier 1 capital must constitute at least 50% of a bank's capital base.
C. Paid-up ordinary shares can be included in Tier 1 capital.
D. Cumulative irredeemable APRA-approved preference shares can be included in
Tier 1 capital.
Difficulty: Hard
Est time: <1 minute
69. Under Basel II prudential standards, an institution is required to maintain a risk-

based capital ratio of _____ of total-risk-weighted assets.
A. 2.00 percent
B. 4.00 percent
C. 8.00 percent
D. 10.00 percent
Difficulty: Easy
Est time: <1 minute
70. The Pillar 1 approach of Basel II capital adequacy incorporates the following three
risk components:
A. credit risk, interest-rate risk and market risk.

B. default risk, interest-rate risk and operational risk.
C. credit risk, market risk and operational risk.
D. default risk, foreign exchange risk and operational risk.
Difficulty: Medium
Est time: <1 minute
71. 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: Medium
Est time: <1 minute
72. 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 balance.

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 50% to the loan to determine the total capital
requirement.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Est time: <1 minute
Learning Objective: 2.8 Understand the standardised approach to credit risk and compute the capital requirements for particular
transactions.
Section: Extended learning A
73. 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%.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Est time: <1 minute
transactions.
74. 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%.
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Est time: <1 minute
transactions.
75. Under Pillar 1 of the Basel II framework, the risk weight for a residential housing
loan is determined by the:
A. amount borrowed.
B. level of mortgage insurance.
C. house valuation.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
transactions.
76. 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. $16 000
B. $40 000
C. $80 000
D. $120 000
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Est time: <1 minute
transactions.
77. 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. $6 400
B. $16 000
C. $160 000
D. $240 000
AACSB: Analytic
Blooms: Application
Difficulty: Hard
Est time: <1 minute
transactions.
78. 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 approach

B. foundation external ratings-based approach
C. standardised approach
D. standardised approach with external ratings
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
79. Under Basel II capital accord, the approach to credit risk that requires a bank to
assign risk weights given by the prudential supervisor is called:
A. an advanced approach.
B. a foundation approach.
C. a standardised approach.
D. advanced-internal ratings.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
80. The risk that arises from chance of loss as a result of inadequate internal bank
processes is called:
A. default risk.
B. interest rate risk.
C. market risk.
D. operational risk.
Difficulty: Medium
Est time: <1 minute
81. Which of the following statements about recently adopted guidelines covering
capital requirements for market risk that banks are required to perform is false?
A. Banks use a risk measurement model based on a VaR approach.

B. Banks estimate the sensitivity of portfolio components to small changes in
prices.
C. Banks must hold capital against risk of loss from changes in interest rates.
D. Banks hold a fixed allocation of funds between various balance sheet assets and
off-balance-sheet business.
Difficulty: Medium
Est time: <1 minute
82. For a commercial bank operating in foreign exchange, interest rate and equity
markets, the capital adequacy guidelines for the market risk it is exposed to fall
under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
83. For a commercial bank's normal day-to-day business, the capital adequacy
guidelines for the operational risk it is exposed to fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
84. For a commercial bank's market discipline, the capital adequacy guidelines for its
disclosure and transparency requirements fall under:
A. Pillar 1.
B. Pillar 2.
C. Pillar 3.
D. Pillar 4.
Blooms: Synthesis
Difficulty: Medium
Est time: <1 minute
85. Under _____ of Basel II, bank supervisors should review and evaluate banks'
internal capital adequacy assessments.
A. Pillar 4
B. Pillar 3
C. Pillar 1
D. Pillar 2
Difficulty: Medium
Est time: <1 minute
86. Part of a bank's liquidity management is to hold a portfolio of:
A. term loans.
B. mortgages.
C. Commonwealth government securities.
D. credit card loans.
Difficulty: Medium
Est time: <1 minute
87. In relation to a bank, liquidity management means:
A. the bank's ability to quickly convert deposits into loans.

B. the bank's ability to onsell its loans.
C. the bank's ability to have funds available when depositors' funds mature.
D. the bank's policies and practices in identifying and managing its loans portfolios.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 2.7 Examine liquidity management and other supervisory controls applied by APRA in the context of Basel III.
Section: 2.8 Liquidity management and other supervisory controls
88. Commercial banks are the main type of financial institution in a financial system
because they hold the largest amounts of financial assets.
TRUE
Banks 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: Easy
Est time: <1 minute
89. The greater the dominance of commercial banks in an economy, the less regulation
required.
FALSE
Because 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.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
90. Banks obtain funds from many areas. These sources of funds appear as liabilities on
a bank's balance sheet.
TRUE
Deposits are a major part of a bank's sources of funds and a bank needs to pay
interest expenses.
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
91. Liability management is where banks actively manage their liabilities in order to
meet future loan demand.
TRUE
Blooms: Knowledge
Difficulty: Easy
Est time: <1 minute
92. Call deposits are funds lodged in a bank account for a specified short-term period.
FALSE
Blooms: Evaluation
Difficulty: Easy
Est time: <1 minute
93. 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
Blooms: Evaluation
Difficulty: Medium
Est time: <1 minute
94. One of the important attributes of certificates of deposit for a bank is the ability to
adjust the yields on new issues.
TRUE
The yield on a CD cannot be adjusted until it reaches maturity and a new CD is
issued.
Blooms: Evaluation
Difficulty: Easy
Est time: <1 minute
95. 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
A normal bank acquires most of its funding from deposits.

Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
96. A bank may seek to obtain funds by issuing unsecured notes with a collaterised
floating charge over its deposits.
FALSE
Unsecured notes do not have any security attached.

Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
97. Foreign currency liabilities are debt instruments issued into another country but not
denominated in the currency of that country.
FALSE
Foreign currency liabilities are typically denominated in foreign currencies such as
US dollars, the yen and pound sterling.
Blooms: Synthesis
Difficulty: Easy
Est time: <1 minute
98. 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 primarily the more liquid
funds from current account deposits (call deposits). Next 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.
Blooms: Knowledge
99. 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. Alternatively, 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. Consequently, the
bank could provide both a bill acceptance facility and a bill discount facility.
Blooms: Knowledge
100. 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.
101. 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.
102. Within the context of off-balance-sheet business, explain direct credit substitutes,
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.
Chapter 3
1. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.1 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their
off-balance-sheet business, in particular mergers and acquisitions.
Section: 3.1 Investment banks
2. Money market corporations:
A. obtain all their funding by issuing bank bills.

B. are generally referred to as investment banks.
C. offer money market deposits to retail clients.
D. sell money market securities to retail clients.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
3. The task of the investment bank in a public issue of new shares is to:
A. offer interim financing to the firm.

B. invest the funds raised in the capital markets.
C. provide advice in designing and pricing a share issue.
D. act as a trustee of the funds raised.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
4. 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 like commercial
banks are required to.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
5. 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
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. According to the text, the principal source of income for investment banks is:
A. issuing bank bills.

B. off-balance-sheet business.
C. issuing secondary securities.
D. issuing certificates of deposit.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
7. Money market corporations (merchant and investment banks) have significantly increased
their off-balance-sheet business on account of competition. All of the following are off-
balance-sheet activities of investment banks except:
A. mergers and acquisitions.

B. managing project finance undertakings.
C. trading in the short-term money market.
D. strategic risk management advice.
Difficulty: Medium
Est time: <1 minute
8. 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
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. 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.
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
10. The detailed analysis of a firm's financial statements as part of a possible takeover is called:
A. share analysis.
B. technical analysis.
C. due diligence.
D. project management.
AACSB: Ethical
Difficulty: Medium
Est time: <1 minute
11. Underwriting is when a/an:
A. broker places new share issues with selected financial institutions.

B. investment bank gives advice to a company about a merger.
C. broker or a financial institution guarantees prices on a security issue for a company.
D. investment bank finds funding for a company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. When an investment bank helps a company sell large parcels of shares directly to institutional
investors, this is called:
A. due diligence.
B. placement.
C. securitisation.
D. underwriting.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
14. 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
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. Venture capital is:
A. funding provided for a new start-up business by a group of investors.

B. providing advice to companies on the raising of new capital.
C. short-term funding provided by banks.
D. placement of securities to institutional investors.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
16. The ________ is the company in a merger transaction that is being pursued as a takeover
possibility.
A. target company
B. takeover company
C. conglomerate company
D. hostile company
Difficulty: Easy
Est time: <1 minute
17. 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
Difficulty: Medium
Est time: <1 minute
18. If a car manufacturer were to purchase one of the companies listed below, which purchase
would be called a vertical takeover?
A. An electronic components supplier

B. A rival car manufacturer
C. A travel company
D. A finance company
Difficulty: Medium
Est time: <1 minute
19. The following factors are all reasons for mergers except:
A. finances.
B. economies of scale.
C. business diversification.
D. reduction of debt.

Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
20. The financial institution that pools funds for 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.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.2 Explain the structure, roles and operation of managed funds and identify factors that have influenced
their rapid growth.
Section: 3.2 Managed funds
21. Which of the following statements about managed funds is incorrect?
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.
Difficulty: Medium
Est time: <1 minute
their rapid growth.
22. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
their rapid growth.
23. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
their rapid growth.
24. An investor who wishes to save for their retirement in 20 years' time and who has a high
propensity for taking risk is likely to invest in a managed fund which invests in government
securities and:
A. cash deposits.
B. some property.
C. debentures.
D. foreign equities.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
their rapid growth.
25. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
their rapid growth.
26. Funds under management by managed funds in 2010 have a value of:
A. $345b.
B. $500b.
C. $1000b.
D. $1666b.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
their rapid growth.
27. A mutual investment fund that specialises in short-term debt instruments and 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.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.3 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.3 Cash management trusts
28. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
29. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
30. 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.
Difficulty: Medium
Est time: <1 minute
Section: 3.4 Public unit trusts
31. Since the early 1990s, public unit trusts have seen the largest growth in assets in:
A. cash and deposits.

B. long-term government securities.
C. equities and units in trusts.
D. land and buildings.
Difficulty: Medium
Est time: <1 minute
32. 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.
Difficulty: Medium
Est time: <1 minute
33. 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.
Difficulty: Medium
Est time: <1 minute
34. 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
Difficulty: Medium
Est time: <1 minute
35. 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
Difficulty: Easy
Est time: <1 minute
36. 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. can be sold at any time by the unit holder in the marketplace.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property.
Difficulty: Easy
Est time: <1 minute
37. 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.
Difficulty: Easy
Est time: <1 minute
38. 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
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.4 Describe the nature and roles of superannuation funds, including the primary sources of
superannuation funds and the different types of fund.
Section: 3.5 Superannuation funds
39. Essentially, superannuation assets 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. Recent figures about superannuation assets in Australia show that the largest amounts of
assets are in the ____:
A. corporate superannuation funds.

B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
41. 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.

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
42. Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold
_____-term assets.
A. long, long
B. long, short
C. short, long
D. short, short
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. 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.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
45. 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.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
46. 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.

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
47. 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.
Difficulty: Medium
Est time: <1 minute
48. The superannuation fund where the amount of funds available at retirement consists of past
contributions plus earnings less taxes and expenses is called:
A. a defined benefit fund.

B. an accumulation fund.
C. a defined termination fund.
D. a defined payout fund.
Difficulty: Medium
Est time: <1 minute
49. 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.

Difficulty: Medium
Est time: <1 minute
50. When an employee makes regular contributions equal to 7% of their salary and their
employer also contributes the equivalent of 14% of salary to a superannuation fund that is an
accumulation scheme:
A. the 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.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
51. 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.

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
52. 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% 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.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
53. 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

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.5 Define life insurance offices and general insurance offices and explain the main types of insurance
policies offered by each type of insurer.
Section: 3.6 Life insurance offices
54. 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.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
55. In Australia, the prudential supervisor of life insurance offices is:
A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
D. PSLI.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
56. Which of the following statements with regard to life insurance companies is true?
(p. 56)
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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
57. 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.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
58. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
59. Life insurance offices are providers of superannuation products which make up ______ per
cent of the assets of life insurance offices' statutory funds.
A. 57
B. 67
C. 77
D. 87
Difficulty: Medium
Est time: <1 minute
60. 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
Difficulty: Medium
Est time: <1 minute
61. 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
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
62. 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
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 3.7 General insurance offices
64. 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.

Difficulty: Easy
Est time: <1 minute
65. 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.

Difficulty: Medium
Est time: <1 minute
66. 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

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

Difficulty: Easy
Est time: <1 minute
68. 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.

Difficulty: Medium
Est time: <1 minute
69. 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.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. 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.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 3.6 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.8 Hedge funds
71. A hedge fund that takes a long position in the Australian foreign exchange market is
forecasting Australian foreign currency will:
A. decrease.
B. increase.
C. stay the same.
D. decrease in the long-term.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. 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.

Difficulty: Easy
Est time: <1 minute
73. 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.

Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.7 Explain the principal functions of finance companies and general financiers and the changes that
have had an impact on finance company business.
Section: 3.9 Finance companies and general financiers
74. 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.

Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
75. 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.

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

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
77. By the end of the 1990s, there had been a substantial contraction in the building society
(p. 77) 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

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.8 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
78. Which of the following statement about building societies in Australia is incorrect?
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.
AACSB: Diversity/Multicultural
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
79. 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.
Bloom's: Evaluation
Difficulty: Easy
Est time: <1 minute
80. In Australia permanent building societies are supervised by:
A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
D. ASX.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
81. 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

Difficulty: Easy
Est time: <1 minute
82. 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.
D. all of the given answers are correct.

Difficulty: Easy
Est time: <1 minute
83. An important source of funds for credit unions is:
A. cheque accounts.
B. loan interest.
C. interest from government securities.
D. financial support from the organisations that employ its members.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. The uses of funds for credit unions are mainly:
A. company shares.
B. commercial paper.
C. debentures and unsecured notes.
D. mortgages.

Difficulty: Easy
Est time: <1 minute
85. 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 among society members.

B. through the wide dispersion of societies throughout the country.
C. because of the full range of financial services provided.
D. because of a guarantee of deposits provided by the government.

Difficulty: Easy
Est time: <1 minute
86. Which of the following holds the smallest percentage of total assets of financial institutions:
finance companies, credit unions, managed funds and permanent building societies?
A. Building societies
B. Credit unions
C. Finance companies
D. Managed funds
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
87. 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.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Learning Objective: 3.9 Describe the unique role of export finance corporations.
88. 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.
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
89. 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.

Difficulty: Medium
Est time: <1 minute
90. Which of the following features is NOT generally true of project finance in Australia?
A. Guarantees provided by sponsors to lenders usually do not cover all the risks involved in
the project.
B. A project company is usually established as a separate legal entity.
C. Lenders rely mainly on the expected future cash flows and the assets of the project.
D. Finance is usually established on a non-recourse basis.

Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
91. Unlike commercial banks, investment banks only accept deposits from large corporations.
FALSE
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
92. As investment banks have increased their underwriting activities in recent years, the number
of financial assets held by them has similarly increased.
FALSE
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
93. In the context of a merger, the process of due diligence involves valuing the target company
shares.
FALSE
Due diligence is detailed analysis of the financial and operational condition of the target
company.
Difficulty: Easy
Est time: <1 minute
94. In relation to Australian managed funds, cash management trusts currently have the largest
amount of funds under management.
FALSE
Superannuation trusts have the largest amount of funds under management.

Difficulty: Easy
Est time: <1 minute
95. In relation to Australian managed funds, superannuation funds currently have the largest
amount of funds under management.
TRUE
Since the introduction of compulsory superannuation, superannuation funds have achieved
significant growth.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. A capital guaranteed fund guarantees that contributors will receive at least the value of the
contributions and future earnings of the fund.
FALSE
Only the capital is guaranteed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
their rapid growth.
97. A managed growth fund is designed to maximise the return from appreciation in the value of
assets in its portfolio.
TRUE
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
their rapid growth.
98. On average, the value of a balanced growth fund is subject to less market fluctuation than that
of a capital growth fund.
TRUE
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
their rapid growth.
99. Cash management trusts are restricted under their trust deed to hold only bank deposits and
cash.
FALSE
Cash management trusts are generally restricted to short-term money market securities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
100. An insurance company is not a depository financial institution.
TRUE
Insurance companies receive funds in the form of premiums.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
101. Explain the role and operation of one of the largest types of managed funds, superannuation
funds.
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.
102. Explain the operation of cash management trusts.
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
return for the short-term funds of smaller investors as a consequence of indirect access to the
wholesale money markets.
Bloom's: Knowledge
103. Identify and discuss the types of public unit trusts according to their assets.
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
104. What do hedge funds do? Discuss any concerns their operations may have for the financial
system.
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
105. What are the principal assets of a finance company? How have these been affected in recent
years?
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.
Chapter 4
1. A business organisation that is a separate legal entity, can buy property

(p. ) in its own name and can enter into contracts with other entities is a:
A. sole proprietorship.
B. partnership.
C. special partnership.
D. corporation.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
Learning Objective: 4.1 Understand the structure of a corporation and identify advantages and disadvantages of
being a publicly listed corporation.
Section: 4.1 The nature of a corporation
2. A publicly listed corporation:

(p. )
A. has its shares listed on a formal exchange.

B. is a legal entity (as part of the Corporations law of a nation-state).
C. has to comply with the rules of the exchange where it is listed.
D. is all of the given choices.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
3. A corporation:
(p. )
A. has a widely dispersed ownership amongst its shareholders.

B. has its objectives and policies decided by a board of directors.
C. has an executive management group responsible for day-to-day
management of the corporation.
D. is all of the given choices.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
4. The actual owners of a company is/are the:

(p. )
A. board of directors.
B. executive management group.
C. shareholders.
D. creditors.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
5. The _______ is/are responsible for conducting the day-to-day financial

(p. ) and operational affairs of the company.
A. board of directors
B. executive management group
C. shareholders
D. creditors
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
6. The _______ is/are responsible for the objectives and policies of the
(p. ) company, but not its day-to-day affairs.
A. board of directors
B. executive management group
C. shareholders
D. creditors
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
7. Which of the following forms of business organisation is characterised

(p. ) by limited liability?
A. Sole partnership
B. Partnership
C. General partnership
D. Corporation
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
8. If a sole proprietorship fails to meet its obligations to its creditors, then:

(p. )
A. the creditors have a legal right to take possession of the personal

assets of the owner(s).
B. the creditors are restricted in what rights they have over the personal
assets of the owner(s).
C. the liability of the sole proprietorship is restricted to the value of the
original issue price.
D. the rights of the creditors are restricted to the financial assets of the
owner(s).
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
9. If a growing organisation wanted to set itself up so it had greater access

(p. ) to a wider range of capital, it would become a:
B. partnership.
C. general partnership.
D. listed corporation.
Difficulty: Medium
Est Time: <1 minute
10. The owners of _______ face unlimited liability.

(p. )
A. sole proprietorships only

B. sole proprietorships and partnerships only
C. corporations only
D. partnerships and corporations only
Difficulty: Medium
Est Time: <1 minute
11. The liability of shareholders in ‘limited liability' companies means:

(p. )
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 shares.
B. shareholders are only liable for any amount that is unpaid on the
shares of a company.
C. in the event of company default, the creditors have no claim on the
shareholders for any contribution.
D. shareholders do not have a right to participate directly in the day-to-
day management of a company.
Difficulty: Medium
Est Time: <1 minute
12. Because of their _____ liability, corporate stockholders are more

(p. ) interested in chances of _____.
A. limited; failure than success

B. limited; success than failure
C. unlimited; success than failure
D. unlimited; failure than success
Difficulty: Medium
Est Time: <1 minute
13. Which of the following about a corporation is incorrect?
(p. )
A. The executive management group of a corporation is responsible to

its board of directors.
B. Under corporation law the board of directors of a corporation must
report to its shareholders.
C. The directors of a corporation have a legal responsibility to make
sure the corporation acts in the shareholders' best interests.
D. The shareholders of a publicly listed small corporation have the right
to participate in the day-to-day management of the business.
Difficulty: Medium
Est Time: <1 minute
14. When a no-liability company defaults on its loans with its creditors, this
(p. ) means the:
A. creditors have a legal claim against the directors only.

B. creditors have a legal claim against the CEO only.
C. creditors have a legal claim against the chairman of the company.
D. shareholders do not have to meet any remaining payment on shares.
Difficulty: Easy
Est Time: <1 minute
15. When the owners of a company hire full-time executives to be

(p. ) responsible for the day-to-day decisions, this _____ the _____ problem.
A. lessens, shareholder-lender
B. lessens, managers-shareholders
C. brings on, managers-shareholders
D. brings on, shareholder-lender
Difficulty: Medium
Est Time: <1 minute
16. All of the following are advantages of a corporation except:

(p. )
A. freely transferable ownership.

B. limited liability.
C. access to capital markets.
D. low management costs.
Difficulty: Easy
Est Time: <1 minute
17. Which of the following statements regarding companies is incorrect?

(p. )
A. A company is a discrete legal entity.

B. Since shares represent ownership in a company, ownership cannot be
readily transferred to new owners.
C. A company has a potentially unlimited life.
D. The shareholders' liability is limited.
Difficulty: Easy
Est Time: <1 minute
18. When a corporation continues to operate regardless of changes in
(p. ) ownership, this is known as:
A. the right of perpetual succession.

B. perpetual shares.
C. perpetual trading.
D. unlimited succession.
Difficulty: Easy
Est Time: <1 minute
19. Which of the following is NOT an advantage of the corporate form of

(p. ) organisation?
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.
Difficulty: Easy
Est Time: <1 minute
20. Which of the following is an advantage of the corporate form of

(p. ) organisation?
A. The managers that control day-to-day operations have a strong

incentive to act in the best interests of shareholders.
B. As agents of the shareholders, the managers want to follow a growth
maximisation strategy.
C. The managers want to increase the number of staff so they can grow.
D. A wide pool of investors can supply large amounts of corporate
funding to the corporation.
Difficulty: Easy
Est Time: <1 minute
21. Many companies use ______ to align the interests of shareholders with
(p. ) those of management.
A. bond options
B. share options
C. company cars
D. debentures
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
22. Agency theory is concerned with:

(p. )
A. a conflict between owners and managers.

B. the agents who act on behalf of the company.
C. the relationship between employees.
D. the conflict of interests between outside agents and the company.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
23. The conflict of interests between the goals of the firm's owners and
(p. ) those of its managers is:
A. the antagonism theory.

B. the agency problem.
C. reduced when the company is large.
D. serious only when sales volumes decline dramatically.
AACSB: Ethical
Difficulty: Easy
Est Time: <1 minute
24. The key aspect of the agency relationship for the corporate form of
(p. ) business is that:
A. the firm's owners will always act in the best interests of the
managers.
B. the managers will always act in the best interests of the firm's
owners.
C. with their management contracts, the managers have the incentive to
act in the best interests of the shareholders.
D. the managers have different incentives from the shareholders.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
25. Which of the following would NOT relate to agency costs involving
(p. ) management's desire to maximise its benefits?
A. Management goals to achieve sales growth.

B. Management goals to achieve market share.
C. Management remuneration packages.
D. Management reports to shareholders.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
26. Agency problems are reduced by:
(p. )
A. monitoring management behaviour.

B. the shareholders' ability to sell their shares.
C. the threat of takeover by another firm.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
27. Agency problems would be less likely to exist in a:

(p. )
B. partnership.
C. private company.
D. public company.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
28. The members of the board of directors of a corporation are elected by

(p. ) the:
A. executive management group.

B. shareholders.
C. creditors.
D. debt holders.
Difficulty: Medium
Est Time: <1 minute
29. A primary aim of corporate management should be to:
(p. )
A. maximise the company's profit.

B. maximise the number of shareholders.
C. maximise the shareholders' wealth.
D. minimise the company's costs.
Difficulty: Medium
Est Time: <1 minute
30. The most appropriate goal for corporate management, according to

(p. ) finance theory, is to:
A. maximise the company's market share.

B. maximise the current profits of the company.
C. maximise the company's share price.
D. minimise the company's liabilities.
Difficulty: Medium
Est Time: <1 minute
31. A _______ represents a financial claim to the cash flow of a business

(p. ) after all other claims have been deducted.
A. bond
B. debenture
C. share
D. preference share
Difficulty: Easy
Est Time: <1 minute
32. Which of the following is NOT a feature of a share?
(p. )
A. Part ownership in the company

B. The right to vote in the control of the company
C. Readily transferable
D. The right to periodic payments
Difficulty: Easy
Est Time: <1 minute
33. Consider the following statements:

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

B. 2 statements are true and 3 are false
C. 3 statements are true and 2 are false
D. 4 statements are true and 1 is false
Bloom's: Synthesis
Difficulty: Hard
Est Time: <1 minute
34. Which of the following statements about share markets is false?

(p. )
A. They help carry out direct financing.

B. Most of the trading takes place in already-issued shares.
C. Share markets have aided in the increase in importance of
corporations.
D. Every time a listed company's shares are bought or sold, the
company receives funding.
Difficulty: Easy
Est Time: <1 minute
Learning Objective: 4.2 Consider the origins and purpose of a stock exchange.
Section: 4.2 The stock exchange
35. The total number of equity raisings on the Australian Securities

(p. ) Exchange (ASX) primary market over the past 20 years has:
A. increased.
B. decreased.
C. remained stable.
D. decreased significantly.
Difficulty: Easy
Est Time: <1 minute
Learning Objective: 4.3 Understand the primary market role of a stock exchange through which corporations raise
new funding.
Section: 4.3 The primary market role of a stock exchange
36. The greatest number of issues of equity capital on the ASX over recent
(p. ) years has involved:
A. rights issues.
B. placements.
C. dividend reinvestment.
D. new floats.
Difficulty: Medium
Est Time: <1 minute
new funding.
37. The number of listed companies in the ASX is approximately:

(p. )
A. 1000
B. 1200
C. 2000
D. 2200
Difficulty: Medium
Est Time: <1 minute
new funding.
38. The listing of new companies on an exchange such as the ASX is known
(p. ) as:
A. share buybacks.
B. initial public offerings.
C. share issues.
D. rights issues.
Difficulty: Easy
Est Time: <1 minute
new funding.
39. Which of the following security types is NOT usually listed on the
(p. ) ASX?
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper
Difficulty: Medium
Est Time: <1 minute
new funding.
40. An issue of new shares to the public must have:

(p. )
A. a prospectus attached.
B. an underwriter.
C. detailed documents called covenants.
D. a memorandum of understanding in place.
Difficulty: Medium
Est Time: <1 minute
new funding.
41. From a company's viewpoint, the existence of an active, liquid, well-

(p. ) 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.
Difficulty: Medium
Est Time: <1 minute
new funding.
42. An initial public share offering represents the share market's _____ role.
(p. )
A. interest rate
B. information
C. primary
D. secondary
Difficulty: Medium
Est Time: <1 minute
new funding.
43. The primary market role of a stock exchange is:

(p. )
A. to trade the shares of the largest corporations.

B. to ensure the sale of new-issue securities.
C. to ensure deep trades in listed securities.
D. to ensure that information about listed companies is quickly reflected
in share prices.
Difficulty: Medium
Est Time: <1 minute
new funding.
44. Which of the following securities would you expect to buy on the
(p. ) primary market?
A. A bond that has no maturity left.

B. A bond with a very long maturity date.
C. A newly issued share.
D. A previously issued share.
Difficulty: Easy
Est Time: <1 minute
new funding.
45. The company process that gives the shareholders the chance to change
(p. ) their dividends into additional company shares is called:
A. share placement.
B. dividend reinvestment scheme.
C. secondary public offering.
D. rights issue.
Difficulty: Easy
Est Time: <1 minute
new funding.
46. The distribution of extra shares by a company to all existing

(p. ) shareholders is called a:
A. new float
B. private placement
C. secondary float
D. rights issue
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
new funding.
47. The selling of new shares to a selected number of institutional investors

(p. ) is called a/an:
A. share release.
B. share placement.
C. share float.
D. initial offering.
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
new funding.
48. Compared with other forms of equity raisings, share placements:

(p. )
A. can be quicker but more expensive because of the short time frame
involved.
B. can be quicker if a prospectus is available for distribution.
C. can be quicker and often cheaper.
D. involve stricter regulatory requirements for meeting the shorter time
frame involved.
Difficulty: Medium
Est Time: <1 minute
new funding.
49. The basic role of a company underwriter about to list a new share issue
(p. ) on a stock exchange is to:
A. provide advice on the timing of the share issue.

B. ensure the company complies with the stock exchange's listing rules.
C. establish a deep and liquid secondary market in the shares.
D. purchase any unsold shares on issue.
Difficulty: Medium
Est Time: <1 minute
new funding.
50. If the depth and liquidity of a share market is high, it means:

(p. )
A. corporations may raise funds at higher costs.

B. investors will experience higher risk exposures.
C. investors can passively manage their risk exposure.
D. corporations may raise funds at lower costs.
Bloom's: Synthesis
Difficulty: Medium
Est Time: <1 minute
new funding.
51. The document drawn up by a company stating the terms and conditions
(p. ) of a public share issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
new funding.
52. Secondary markets:

(p. )
A. can provide liquidity but do not raise new funds.

B. make capital-raising in the primary market more attractive.
C. help borrowers raise long-term funds.
D. include all of the given choices.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
Learning Objective: 4.4 Discuss the secondary market role of a stock exchange through which existing securities are
bought and sold.
Section: 4.4 The secondary market role of a stock exchange
53. A characteristic of secondary markets for shares is that:

(p. )
A. only highly risky shares are traded.

B. only low-risk shares are traded.
C. they are where companies borrow funds for the second time.
D. companies do not get funds from the secondary market in shares.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
bought and sold.
54. A well-developed secondary market is likely to:

(p. )
A. aid in raising extra finance.

B. help manage risk exposures of investors.
C. help with corporate agency problems.
D. include all of the given answers.
Difficulty: Medium
Est Time: <1 minute
bought and sold.
55. In relation to a share market the ratio of the value of turnover to market
(p. ) capitalisation is called:
A. market depth.
B. market flow.
C. market transfer.
D. market liquidity.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
bought and sold.
56. If a stock exchange provides a market for the trade of specific share
(p. ) market-related derivative products, which of the following options is
generally incorrect?
A. The derivative products provide an investment tool to take advantage

of future share price movements.
B. The derivative products facilitate the management of risk within an
existing share portfolio.
C. The derivative products provide protection against adverse
movements in share prices.
D. The derivative products remove the share price volatility of stocks
listed on the stock exchange.
Bloom's: Synthesis
Difficulty: Hard
Est Time: <1 minute
Learning Objective: 4.5 Examine the managed products (exchange traded funds, contracts for difference, real estate
investment trusts and infrastructure funds) and derivative products (options, warrants and futures contracts) roles of
a stock exchange.
Section: 4.5 The managed product and derivative product roles of a stock exchange
57. Compared with an exchange-traded derivative product, over-the-counter

(p. ) derivative products:
A. are discussed and agreed upon by the parties involved.

B. are standardised.
C. have margin calls.
D. are traded between banks, not on the exchange.
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
58. To protect their portfolio of shares from a possible share price fall, an
(p. ) investor could buy a:
A. call option.
B. put option.
C. warrant on a matching share index.
D. matching share index future.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
a stock exchange.
59. The strategy of lowering risk exposure by holding a number of

(p. ) investments in a portfolio is called:
A. augmentation.
B. diversification.
C. expansion.
D. optimisation.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
60. In options markets, option premiums are paid by:

(p. )
A. option writers to buyers.

B. option buyers to sellers.
C. both option buyers and sellers.
D. put option buyers only.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
a stock exchange.
61. Which of the following is incorrect?

(p. )
A. A real estate investment trust may purchase industrial property.

B. An infrastructure fund may hold investments in power stations.
C. The units of a listed REIT purchases property are generally illiquid.
D. An investor may use a CFD to go long in a rising market.
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
62. An investor holding an investment portfolio who purchases a put option

(p. ) is expecting:
A. share prices to go up in the short term.

B. share prices to fall in the short term.
C. interest rates to go up.
D. interest rates to go down.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
63. The writer of a put option expects the share price to:
(p. )
A. decrease.
B. increase.
C. remain unchanged.
D. pay a dividend.
Difficulty: Medium
Est Time: <1 minute
a stock exchange.
64. If an investor buys a put option on shares he owns and then the price of
(p. ) the shares rises, the investor:
A. must exercise the option.

B. must pay the difference between the contract start and close values.
C. has no obligation to exercise the option.
D. has to pay an additional premium to the option writer.
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
65. A futures contract is a:

(p. )
A. contract that provides a specified commodity or instrument to be

bought at a future date at a price determined at the expiry date.
B. contract that provides a specified commodity or instrument to be
bought at a future date at a price decided today.
C. right to buy a specified commodity or instrument at a price
determined today.
D. right to buy a specified commodity or instrument at a price
determined at the expiry date.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
66. Units sold in a managed investment scheme that follows the

(p. ) performance of a specified share market index are called:
A. contracts for difference.

B. exchange traded funds.
C. option funds.
D. warrant funds.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
67. A contract for difference is:

(p. )
A. the difference between a put and a call option on the same security.
B. the difference between an option and a warrant on the same security.
C. the difference between a physical stock market and the futures
market.
D. an agreement to exchange the difference between a contract start and
close values.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
68. A stock exchange may also list some debt issues of companies and
(p. ) governments. This provision by a stock exchange is known as a/an:
A. subordinate debt market.

B. interest rate market.
C. primary debt market.
D. secondary bond market.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
Learning Objective: 4.6 Examine the interest rate market role of a stock exchange.
Section: 4.6 The interest rate market role of a stock exchange
69. Which of the following statements, in regard to the provision of an

(p. ) interest rate market by a stock exchange, is NOT correct?
A. It is beneficial to both borrowers and lenders because it can add

liquidity.
B. It can provide ease of access to information about debt securities.
C. It can reduce investors' transaction costs.
D. Its main function is to serve as a primary market for debt issues.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
70. Which of the following debt securities is often quoted on the Australian
(p. ) Stock Exchange (ASX)?
A. Bank bills
B. Certificates of deposit
C. Floating rate notes
D. Commercial paper
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
71. Examples of debt instruments listed on a stock exchange do NOT
(p. ) include:
A. corporate bonds.
B. floating rate notes.
C. convertible notes.
D. promissory notes.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
72. The corporate bond that pays a variable rate of interest based on interest
(p. ) rate changes for a reference rate is a/an:
A. adjustable note.
B. convertible note.
C. floating rate note.
D. straight corporate bond.
Bloom's: Synthesis
Difficulty: Medium
Est Time: <1 minute
73. Which of the following is NOT used by the Australian Stock Exchange
(p. ) (the ASX) to promote an efficient market?
A. Rapid release of new information

B. A clearing house
C. Stock trading systems
D. Transaction settlement systems
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
Learning Objective: 4.7 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for
share-market transactions by the Australian Securities Exchange (ASX).
Section: 4.7 The trading and settlement roles of a stock exchange
74. A security that pays a fixed dividend and usually converts to ordinary
(p. ) shares at a future date is called a:
A. corporate bond.
B. floating rate note.
C. preference share.
D. debenture.
Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
75. The Australian Stock Exchange, the ASX now operates a system known
(p. ) as ASX Trade. Which of the following statements is correct in relation
to ASX Trade?
A. It allows individual investors direct access to execute buy/sell orders

on the ASX.
B. At opening of trade, overlapping bids and offers are shared between
existing orders.
C. Share trading is also conducted on the floor of the ASX using
‘chalkies'.
D. It facilitates the efficient processing and settlement of market
transactions through multiple platforms.
Bloom's: Synthesis
Difficulty: Medium
Est Time: <1 minute
76. Which of the following are incorrect?

(p. )
A. On completion of a trade each stock broker will send a contract note

to the buyer and settle.
B. Overlapping bids and offers for shares are executed at each price
level in the order they are recorded in the system.
C. ASX Trade provides a fair, efficient trading system, developing
latency down to the 1 second.
D. Shares listed on the ASX are known as uncertified securities.
Difficulty: Medium
Est Time: <1 minute
77. The Clearing House Electronic Subregister System (CHESS) is operated

(p. ) by the ASX. Which of the following statements regarding CHESS is
incorrect?
A. The system allows settlement of transactions within three working

days.
B. A shareholder must conduct a CHESS transaction with a sponsor.
C. Shareholders can still hold traditional share certificates.
D. The clearing house issues holding statements to uncertified
shareholders.
Bloom's: Synthesis
Difficulty: Hard
Est Time: <1 minute
78. The risk that arises from the failure of parties to complete and resolve a
(p. ) transaction is called:
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
Difficulty: Medium
Est Time: <1 minute
79. The probability that a party to a buy/sell transaction will not complete it
(p. ) is called:
A. basis risk.
B. clearing risk.
C. settlement risk.
D. transaction risk.
Difficulty: Easy
Est Time: <1 minute
80. The reason for the requirement by the ASX for companies to abide by
(p. ) the Corporations Act 2001 (Cwlth) is to:
A. ensure that there will be an active market in the company's shares.

B. maintain investor confidence in the company's creditworthiness.
C. ensure a minimum number of shareholders in the company.
D. ensure that information which may have a material effect on the
share price is provided to the market.
Difficulty: Medium
Est Time: <1 minute
Learning Objective: 4.8 Recognise the importance of information flows to the efficiency and integrity of stock
exchanges.
Section: 4.8 The information role of a stock exchange
81. The rules that apply to listed companies about promptly advising a stock
(p. ) exchange of any material changes relating to the corporation are called:
A. informational disclosure.
B. continuous disclosure.
C. transaction disclosure.
D. related parties disclosure.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
Learning Objective: 4.8 Recognise the importance of information flows to the efficiency and integrity of stock
exchanges.
Section: 4.8 The information role of a stock exchange
82. Having regard to a number of high-profile situations where improper

(p. ) practices resulted in share market volatility, losses to individual
shareholders, and possible breaches of existing legislation, the
Commonwealth government transferred responsibility in 1991 for the
administration of Corporations Law to:
A. the Australian Securities Exchange.

B. the Australian Securities and Investments Commission.
C. individual state government corporate governance authorities.
D. the Australian Consumer and Competition Commission.
Bloom's: Synthesis
Difficulty: Hard
Est Time: <1 minute
Learning Objective: 4.9 Identify the principal regulators that affect the behaviour of participants in the Australian
share market.
Section: 4.9 The regulatory role of a stock exchange
83. ASIC is the regulatory body responsible for the supervision of:
(p. )
A. insurance companies only.

B. insurance and investment companies only.
C. initial public offerings only.
D. corporations law and markets.
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
share market.
84. The major supervisors of the Australian share market are:
(p. )
A. RBA and ASX.

B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.
Bloom's: Knowledge
Difficulty: Medium
Est Time: <1 minute
share market.
85. Which of the following statements is incorrect?

(p. )
A. The Corporations Act 2001 compels continuous disclosure

requirements on a listed company.
B. All corporations, except mining companies, must submit half-yearly
and annual audited reports to the ASX.
C. The main supervisor in the Australian market is the ASX itself.
D. If a listed company does not fully disclose information to the
satisfaction of the ASX, trading in its shares may be suspended.
Bloom's: Evaluation
Difficulty: Medium
Est Time: <1 minute
share market.
86. To try to remove potential conflicts of interest with regard to the ASX
(p. ) monitoring listed companies, ____ has also assumed the role of
supervising the ASX.
A. APRA
B. the Australian Reserve Bank (RBA)
C. ASIC
D. the Stock Brokers Association
AACSB: Ethical
Difficulty: Easy
Est Time: <1 minute
share market.
87. Which regulatory body has responsibility for supervision of real-time

(p. ) trading on Australian domestic licensed markets, including the
supervision of financial services licence holders?
A. APRA
B. ASX
C. ASIC
D. RBA
AACSB: Ethical
Difficulty: Medium
Est Time: <1 minute
share market.
88. Funding that is provided to higher risk companies seeking equity

(p. ) funding (but are unable to access equity funding through a public issue
in the share market) is generally called:
A. bank funding.
B. private placement funding.
C. preference share funding.
D. equity funding.
Difficulty: Medium
Est Time: <1 minute
share market.
89. Shareholders of a public corporation have the right to participate in the
(p. ) profits and receive annual dividends.
FALSE
Shareholders are entitled to a share in profits but are not automatically
entitled to dividend payments, unlike bond holders.

Bloom's: Synthesis
Difficulty: Easy
Est Time: <1 minute
90. The shareholders of a public corporation do not participate directly in

(p. ) the day-to-day operation of a company but appoint the executive
management group to do so at the shareholders' general meeting.
FALSE
The executive management group is appointed by the board of directors.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
91. For a limited liability company the liability is restricted to the debt
(p. ) holders of the company and not the shareholders.
FALSE
Limited liability concerns the shareholders.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
92. The corporate entity means that if a major shareholder is declared

(p. ) bankrupt it does not necessarily impact on the firm's operations.
TRUE
This arises out of the concept of the right of perpetual succession where
a corporation continues to operate regardless of changes in ownership.
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
93. A growth maximisation strategy by management always results in

(p. ) wealth maximisation for the shareholders.
FALSE
It is generally accepted in corporate finance that an organisation should
be managed in such a way as to maximise shareholder value.

Difficulty: Easy
Est Time: <1 minute
94. When a shareholder first sells their shares on a stock exchange this
(p. ) involves the secondary role of the share market.
TRUE
The secondary market transactions in a stock exchange involve the
buying and selling of existing securities.

Difficulty: Easy
Est Time: <1 minute
bought and sold.
95. A common measure of market liquidity is the ratio of turnover to market

(p. ) capitalisation.
TRUE
It is a widely used measure of market liquidity.
Difficulty: Easy
Est Time: <1 minute
bought and sold.
96. An active and well-organised secondary market in existing shares

(p. ) benefits a company because it receives an additional payment from the
share market.
FALSE
A company does not receive any funds from secondary market
transactions, only primary.
Difficulty: Easy
Est Time: <1 minute
bought and sold.
97. The price of an equity-related derivative is directly related to the price of

(p. ) the corresponding security on the stock exchange.
TRUE
As the underlying security price increases (decreases) so the derivative's
price directly increases (decreases).
Bloom's: Knowledge
Difficulty: Easy
Est Time: <1 minute
a stock exchange.
98. Discuss briefly what part agency theory plays in the corporate
(p. ) governance of a company.
Since the shareholders are not directly involved in running the company,
but the managers are, there is the problem of separation of control. Since
the managers of the company do not own the company they will not
necessarily have a strong incentive to act in the best interests of the
shareholders. Since they may be tempted to run the company for their
own personal benefit, this may lead to a conflict of interest known as the
agency problem.
Bloom's: Knowledge
Est Time: 1-3 minutes
99. Discuss briefly the different types of equity capital involved in a modern
(p. ) stock exchange such as the ASX.
The different types of equity capital for a modern stock exchange are
ordinary shares (the most common type), preference shares, rights and
derivative products such as options and warrants. Ordinary shares have a
residual claim on the company assets if the company goes into
liquidation. But ordinary share holders are the ‘owners' of the company
and may share in any profits. Preference shareholders have a fixed
payment.
Bloom's: Evaluation
Learning Objective: 4.2 Consider the origins and purpose of a stock exchange.
Section: 4.2 The stock exchange
100. Discuss the roles of the participants in a primary market issue of shares.
(p. )
The participants in a primary market issue of shares are the advisers and
underwriters (usually brokers, investment banks and other specialists),
the corporations, brokers and the stock exchange.
Bloom's: Evaluation
new funding.
101. Discuss what is meant by the derivative role of a share market.

(p. )
Stock exchanges may provide a market for the trading of equity-related

derivative products such as options, warrants and futures, where a
derivative is a financial security that derives its price from an underlying
commodity or financial instrument.
Bloom's: Knowledge
a stock exchange.
102. Discuss what is meant by the interest rate role of a stock exchange.
(p. )
Not only may a stock exchange have a market for equities but it may
also offer a market for debt instruments such as straight corporate bonds,
debentures, floating rate notes, convertible notes and preference shares.
Chapter 5
1. An investment decision differs from a financing decision in that:
A. investment decisions relate to assets that the firm has invested in,
while financing decisions relate to the firm's financial assets.
B. an investment decision first determines what assets the firm will
invest in, while a financing decision considers if the existing
investments should be refinanced.
C. a financing decision first determines what financial assets the firm
will invest in, while an investment decision considers how the funds
will be invested.
D. an investment decision first determines what assets the firm will
invest in, while a financing decision considers how the investments
under consideration are to be funded.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 5.1 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
2. When a company decides to issue an unsecured note to pay for a new

machine, it has made a/an:
A. capital market decision.

B. money market decision.
C. financing decision.
D. investment decision.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. The finance required by a company to fund its day-to-day operations is

called:
A. daily financing.
B. operational financing.
C. operational capital.
D. working capital.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. When a company decides to pay for an investment project using a short-

term bank loan, this is best described as a/an:
A. capital market decision.

B. money market decision.
C. financing decision.
D. investment decision.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. Which of the following statements is correct for an investment proposal
with a positive NPV?
A. The discount rate exceeds the required rate of return.

B. The IRR is greater than the required rate of return.
C. Accepting the investment proposal has an uncertain effect on
shareholders.
D. The present value of the cash flow equals the cost of the investment.
Difficulty: Medium
Est time: <1 minute
6. Problems associated with calculating an internal rate of return include:
A. negative cash flows during the project's lifetime.

B. choosing one project from two or more projects.
C. timing of cash flows.
D. All of the given answers.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
7. When a company's project results in a return and profits which exceed

the cost of its debt borrowing:
A. both the debt holders and shareholders can share in the profits.
B. only the shareholders may share in the profits.
C. the interest payments to the debt holders may increase.
D. its cost of capital increases.
Difficulty: Medium
Est time: <1 minute
8. Financial risk refers to the:
A. risk of owning financial assets.

B. overall risk of a financial services firm.
C. risk faced by the shareholders when debt is used.
D. risk of not finding finance for a firm's investment.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 5.2 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
9. Increasing the financial leverage of a company will _______

shareholders' expected returns and ______ their risk.
A. increase; not affect

B. increase; decrease
C. increase; increase
D. decrease; increase
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. Which of the following statements about financial risk is incorrect?
A. A rise in interest rates will adversely affect the cost of a corporation's

variable debt.
B. If a corporation imports goods from overseas then an appreciation in
the exchange rate will adversely affect the company's profits.
C. If a company (A) has sold goods to another company (B) with
payment due in 30 days but company B has gone into liquidation
then company A faces credit default.
D. If a company breaches its debt-to-equity ratio loan covenants the
value of the company may be adversely affected.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. Which of the following statements about financial risk is incorrect?
A. The higher the debt-to-equity ratio, the higher the degree of financial
risk.
B. Interest payments on debt must be paid when they fall due.
C. When a business fails equity holders rank ahead of providers of debt
due to their higher financial risk.
D. The higher the proportion of debt the higher the potential return on
shareholders' funds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. A company's business risk depends on:
A. its use of debt in financing the business.

B. the risk of the company's operations and assets.
C. how much debt a company has used.
D. the amount of shareholder equity in the company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. Which of the following criteria would be determinants of the appropriate
ratio of debt to equity if a company should not take on more debt than
can be serviced under conservative economic forecasts?
i. Maximisation of shareholder wealth
ii. Industry norms
iii. History of the ratio for the firm
iv. The stage of the current economic cycle
v. Limit imposed by lenders
vi. The company's capacity to service debt
A. i, iii, v, vi
B. ii, iii, v, vi
C. ii, iii, iv, v
D. iii, iv, v, vi
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
14. Restrictions placed on borrowers by lenders in the loan agreement are

called loan:
A. covenants.
B. limits.
C. arrangements.
D. contracts.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. An increase in a firm's level of debt will:
A. reduce the business risk of the firm.

B. increase the variability in earnings per share.
C. lower the expected return on shareholders' funds.
D. increase the return to the debt holders.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
16. Compared with retail sector companies, banks have a:
A. high equity-to-debt ratio.

B. low gearing ratio.
C. high debt-to-equity ratio.
D. conservative gearing ratio.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
17. The claims of the equity holders on the assets of the firm have priority
over those of:
A. the debt holders.

B. the preferred shareholders.
C. the unsecured debt holders.
D. no other holder.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. Who are sometimes referred to as the residual owners of the
corporation?
A. The secured creditors

B. The unsecured creditors
C. The common shareholders
D. The preferred shareholders
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 5.3 Examine the listing and flotation or initial public offering (IPO) of a business on a stock
exchange, including equity-funding alternatives that are available to a newly listed corporation.
Section: 5.3 Initial public offering
19. What is the function of a proxy statement for a shareholder?
A. It gives them the right of a vote for each share they own.
B. It gives them the right to transfer their share to another party.
C. It gives them the entitlement to new shares when issued.
D. It gives them the right to sell their shares at a premium.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
20. Which of the following statements is NOT a feature of ordinary shares?
A. Ordinary shares are a major source of external equity financing for

companies.
B. Ordinary shares entail voting rights at annual general meetings.
C. Ordinary shares have no fixed payment obligation.
D. Dividends of ordinary shares are always tax deductible.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. Generally, an initial public offering is:
A. an offer to potential investors of ordinary shares to newly list a

company on a stock exchange.
B. an offer to potential investors of preference shares to newly list a
C. an offer to potential investors of company debentures to newly list a
D. an offer to potential investors of unsecured notes to newly list a
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. Holders of equity capital:
A. receive interest payments.

B. own the company.
C. have lent money to the company.
D. have a guaranteed right to income from the company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. Common shareholders are:
A. guaranteed a periodic distribution of dividends

B. guaranteed a distribution in the wind-up of the company.
C. guaranteed both a periodic distribution of dividends and a
distribution in the wind-up of the company.
D. not guaranteed a periodic distribution or a distribution in the wind-up
of the company.
Difficulty: Medium
Est time: <1 minute
24. Which of the following statements best describes the role or function of
the promoter of a flotation?
A. The manager of the sub-underwriting panel or group

B. The broker responsible for the initial sale of shares to investors
C. The party seeking the flotation of the company
D. The agency responsible for marketing the issue to the public
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
25. Potential investors learn of the information concerning the company and
its new issue by being sent a _____ by the broker.
A. registration statement
B. prospectus
C. letter of commitment
D. memorandum offering
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. As part of the listing process for an unlisted organisation, a document
that provides detailed information on the past and forecast performance
for it is a:
A. flotation statement.
B. prospectus.
C. promotion report.
D. memorandum offering.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. When a company undertakes an initial public offering (IPO) it may:
A. issue and list debentures in the capital markets.

B. offer shares to a few public institutional investors.
C. issue and list shares in the primary share market.
D. directly list corporate bonds in the capital markets.
Difficulty: Medium
Est time: <1 minute
28. Compared with raising debt through a bank, the raising of equity
through an IPO is generally:
A. cheaper.
B. dearer.
C. roughly the same.
D. much cheaper.
Difficulty: Medium
Est time: <1 minute
29. A financial institution involved in underwriting the sale of new
securities by buying them from the issuing firms and then reselling them
to the public in the primary capital market is an:
A. investment agent.
B. investment broker.
C. investment dealer.
D. investment banker.
Difficulty: Easy
Est time: <1 minute
30. Which of the following is NOT a role of an underwriter in a public

offering of shares?
A. To provide pricing of the issue

B. To provide advice on the structure of the issue
C. To invest the funds raised in the offering
D. To provide guidance on the timing of the issue
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. If, for an IPO, circumstances change and the issue becomes unattractive,
the underwriters:
A. charge the company more for raising the funds.

B. charge the company less for the IPO.
C. may purchase unsubscribed shares.
D. offer the shares at a lower price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
32. If, for an IPO, market prices have fallen, then underwriters with an out-
clause that gives a level of a specified price index that the index cannot
fall below, then:
A. the underwriters have the right to charge the company more for
raising the funds.
B. the underwriters need to only purchase a specified number of shares
and not the total unsold.
C. the underwriters may be released from their obligations.
D. the underwriters may offer the shares at a lower price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. Ordinary shares in limited liability companies are the major source of
external equity funding for Australian companies. Which of the
following statements regarding the issuance of ordinary shares by a
newly listed limited liability company is incorrect?
A. Shares may be issued on a fully paid or partly paid basis.

B. A holder of instalment receipts only has to pay the remaining amount
when due or called.
C. Share price is determined with reference to a range of variable
factors.
D. No liability company can issue shares only on a fully paid basis
because of the risk.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
34. Companies can raise equity capital through:
A. the money markets.

B. the inter-bank market.
C. retained earnings and the share market.
D. a major bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. A person who is authorised to vote on a shareholder's behalf is called:
A. an underwriter.
B. a proxy.
C. an authorised shareholder.
D. a substitute.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. Which of the following statements about a no liability company is

incorrect?
A. A no liability company will issue shares on a partly paid basis.

B. In Australia only mining companies can list as a no liability
company.
C. A no liability company may also offer shareholders an option to sell
shares back to the company if the company exploration is not
successful.
D. If a no liability gold-mining company discovers gold then for the
product phase the company may issue a further call on the partly paid
shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
37. Financing for high-risk companies is often in the form of:
A. limited liability shares.

B. no-liability shares.
C. limited instalment receipts.
D. contributing shares.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. Which of the following requirements does NOT apply to a company

seeking a public listing on the Australian Securities Exchange (ASX)?
A. The entity must adhere to minimum standards of quality.

B. The entity must adhere to minimum standards of disclosure.
C. The company must issue a prospectus that is to be lodged with the
ASX.
D. The company must have a structure and operation appropriate for a
listed entity.
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.4 Consider important issues associated with listing a business on a stock exchange.
Section: 5.4 Listing a business on a stock exchange
39. Most companies raise funds by selling their securities in a:
A. public float.
B. private placement.
C. stock exchange.
D. direct placement.
Difficulty: Medium
Est time: <1 minute
40. A company may seek to raise further funds by issuing additional

ordinary shares. The terms and conditions of the new share issue are
determined by the board of directors in consultation with its financial
advisers and others, and having regard to the preferences of existing
shareholders and the needs of the company. Which of the following is
LEAST likely to be a determinant of the price that is eventually struck?
A. The discount to current market price that can be offered to

shareholders.
B. The company's cash requirements.
C. The projected earnings flow from the new investments.
D. The cost of alternative funding sources.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.5 Explore equity-funding alternatives that are available to an established listed corporation,
including right issues, share purchase plans, placements, takeover issues, dividend reinvestment schemes, preference
shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
41. Some of the main principles that form the basis of a stock exchange's
listing rules are:
A. sufficient investor interest must be shown to warrant an entity's

participation in the markets.
B. information must be produced according to the highest standards.
C. minimum standards of quality size, operations and disclosure must be
satisfied.
D. security holders must be consulted on matters of significance except
for agreements between the entity and related parties.
Difficulty: Medium
Est time: <1 minute
42. A rights offering is the issue of:
A. proxies to the shareholders to use their voting rights at the annual

general meeting.
B. options on shares to the general public.
C. an option to purchase shares directly to the shareholders.
D. special options to the management.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. A company may raise additional equity capital through:
A. a rights issue.
B. a placement.
C. a dividend reinvestment scheme.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
44. A right that can only be exercised by the shareholder and not sold is
called a:
A. non-saleable right.
B. renounceable right.
C. non-renounceable right.
D. pro-rata right.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. Before making a rights issue, a company's management must consider

several important variables. Which of the following is NOT one of these
variables?
A. The ability of the company to service the increased equity on issue

B. The costs of alternative funding sources
C. Whether there will be a sufficient take-up rate of the issue
D. The effect on the firm's profits
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
46. The subscription price in a rights offering is generally:
A. below the current share price.

B. equal to the current share price.
C. above the current share price.
D. not related to the share price.
Difficulty: Medium
Est time: <1 minute
47. Which of the following is generally NOT a characteristic of rights?
A. No expiration date
B. If exercised, results in the dilution of earnings for existing
shareholders
C. Saleability
D. Potential listing on a stock exchange
Difficulty: Medium
Est time: <1 minute
48. A pro-rata share rights offer means that the offer:
A. must be made to all the stakeholders of a company.

B. must be made to bond holders and shareholders who get their offer in
before a cut-off date.
C. must be made to shareholders on the basis of the number of shares
already held.
D. is made only to the shareholders with the largest number of shares on
the share register at a cut-off date.
Difficulty: Medium
Est time: <1 minute
49. A pro-rata share rights offer of 1:5 gives existing shareholders:
A. the right to purchase one new share for every five shares held.
B. the right to purchase five new shares for every one share held.
C. the right to purchase one share for every 1/5 shares held.
D. the right to purchase 10 shares for every five shares held.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
50. For a share placement, the Australian authority ASIC requires:
A. that a placement must consist of subscriptions of not less than $1 000

000.
B. that any discount from the current market price not be more than
10%.
C. a memorandum of information to be sent to all participating
institutions.
D. a prospectus, which can be filed with them after the event.
Difficulty: Medium
Est time: <1 minute
51. For a share placement, the Australian authority ASIC or ASX listing
rules require:
A. that a placement must consist of subscriptions of not less than $1 000

000.
B. there must be no more than 20 participants.
C. the discount from market price must not be above 50 per cent.
D. that for a company that has had total placements of more than 15 per
cent in the last 12 months, agreement for another must be sought
from shareholders at the annual general meeting.
Difficulty: Medium
Est time: <1 minute
52. Share placements may, subject to compliance with certain regulations,

be made to institutional investors. Which of the following conditions is
NOT a requirement of the Australian authority ASIC for share
placements?
A. The placement should consist of minimum subscriptions of $500

000, or be made up of not more than 20 participants.
B. The discount from current market price should not be excessive.
C. Under no circumstances should placements be in excess of 10% of
the issued shares permitted.
D. There is no need to register a prospectus, but a memorandum of
information detailing the company's activities should be sent to all
participants.
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute
53. If a company raises equity funds by issuing shares to a selected number

of institutional investors, this is known as:
A. a share appointment.
B. a placement.
C. a share rights issue.
D. share transfer.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
54. Compared with a pro-rata issue of shares, placements usually:
A. take a longer time to organise.

B. can be carried out much more quickly.
C. involve a far greater discount to the current market price.
D. involve no more than 50 participants.
Difficulty: Medium
Est time: <1 minute
55. The main advantage of placements to raise additional equity funds
compared to a rights issue is:
A. the discount to current market price may be less.

B. it can be carried out much more quickly.
C. a selective placement can sell shares to friendly institutional
investors.
D. it reduces the proportion of ownership by existing shareholders.
Difficulty: Medium
Est time: <1 minute
56. When a takeover company issues additional shares to fund the

acquisition of the shares in a target company this is called:
A. a seasoned share offering.

B. an equity-funded takeover.
C. an initial share takeover.
D. a rights offering.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
57. Which of the following does NOT apply to a dividend reinvestment

plan?
A. A dividend reinvestment plan forms additional equity financing for

the company.
B. For a dividend reinvestment scheme the company typically bears the
associated transaction costs.
C. Companies have encouraged shareholders to use dividend
reinvestment plans.
D. Shareholders have the chance of purchasing additional shares
through a dividend reinvestment plan.
Difficulty: Medium
Est time: <1 minute
58. Which of the following is NOT a feature of a dividend reinvestment

scheme for a company?
A. Shareholders can acquire company shares at little or no transaction

cost.
B. Shareholders can increase their return on the company share
concerned.
C. The company can obtain additional equity funding.
D. The shareholders can redeem shares for dividends.
Difficulty: Medium
Est time: <1 minute
59. A dividend reinvestment plan generally _______ on the security.
A. decreases the return

B. increases the return
C. has no effect on the return
D. has an uncertain effect
Difficulty: Medium
Est time: <1 minute
60. Dividend reinvestment schemes are a significant source of equity for

many Australian companies. Which of the following advantages of
dividend reinvestment schemes may, at times, also be regarded as a
disadvantage?
A. The shareholder avoids transaction costs on the share issue.
B. The share issue price is usually at a discount to the average market
price.
C. Such schemes allow dividends to be paid while retaining cash for
future growth.
D. The company is able to pass on franking credit to its shareholders.
Difficulty: Medium
Est time: <1 minute
61. _______ are promised a fixed periodic dividend, the payment of which
must be paid before that of ordinary shares.
A. Common shareholders
B. Preferred shareholders
C. Stakeholders
D. Creditors
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
62. Any unpaid dividends that must be paid before payment of dividends to
ordinary shareholders are called _________ preference shares.
A. participating
B. cumulative
C. non-cumulative
D. secured
Difficulty: Medium
Est time: <1 minute
63. A company is likely to issue _____ if it has reached its optimal gearing
level.
A. options
B. rights
C. ordinary shares
D. preference shares
Difficulty: Easy
Est time: <1 minute
64. Holders of _________ preference shares are entitled to dividend

payments beyond the stated dividend rate.
A. participating
B. cumulative
C. non-cumulative
D. secured
Difficulty: Medium
Est time: <1 minute
65. A preference share issue offers all of the following advantages to a
company except:
A. a flexible dividend policy.

B. fixed interest borrowings that can count as equity.
C. extension of the equity base of the company.
D. an indefinite maturity.
Difficulty: Medium
Est time: <1 minute
66. Which of the following is NOT a feature of preference shares?
A. Convertible
B. Redeemable
C. Cumulative
D. An important source of company funding
Difficulty: Easy
Est time: <1 minute
67. Preference shares:
A. have their dividend fixed at the issue date.

B. rank behind ordinary shares in the payment of dividends.
C. rank behind ordinary shareholders in their claim on company assets
in the event of liquidation.
D. rank ahead of the company creditors.
Difficulty: Medium
Est time: <1 minute
68. Preference shares have a number of features similar to debt that

distinguish them from ordinary shares. Which of the following features
may be incorporated in a preference share issue?
i. Cumulative or non-cumulative
ii. Convertible or non-convertible
iii. Redeemable or non-redeemable
iv. Issued at different rankings
v. Participating or non-participating
A. i, ii, iii, iv
B. i, ii, iv, v
C. ii, iii, iv, v
D. All of the given answers
Difficulty: Medium
Est time: <1 minute
69. Convertible preference shares are normally converted into:
A. debentures.
B. bonds.
C. shares.
D. warrants.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
70. Compared with ordinary shares, preference shares usually:
A. rank ahead of a company's creditors in the case of a wind-up.

B. have dividends set at issue.
C. are viewed as debt financing.
D. pay their dividends after ordinary shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. A convertible note is a/an:
A. equity instrument that converts into debt at maturity.

B. equity instrument that converts into a specified number of shares at
maturity.
C. debt instrument that the holder has the option to convert into an
initially specified number of shares.
D. warrant that the holder has the option to convert into an initially
agreed-upon number of shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. Which of the following statements is NOT a feature of convertible

notes?
A. Convertible notes offer a lower interest rate than straight debt

instruments.
B. Convertible notes are usually made available to ordinary
shareholders.
C. Maturity of convertible notes is usually shorter than straight debt
instruments.
D. Note holders can generally participate in new issues of equity.
Difficulty: Medium
Est time: <1 minute
73. Which of the following is NOT a feature of convertible notes?
A. Convertible notes are usually issued at a price close to the market

price of the share.
B. The expectation of the note holder is that the share price will increase
over the term of the note.
C. Convertible notes offer a higher interest rate than straight debt
instruments.
D. A convertible note may be made by direct placement to shareholders.
Difficulty: Medium
Est time: <1 minute
74. An advantage of a convertible security for a company is that it can

generally be sold with interest rates _______ other non-convertible debt
securities.
A. higher than
B. equal to
C. lower than
D. unrelated to
Difficulty: Medium
Est time: <1 minute
75. The buyer of a convertible security accepts a lower rate of interest
because of:
A. a lower default risk.

B. the possibility that the company may recall the security.
C. the accessibility of funds.
D. the possibility of becoming a shareholder in the future.
Difficulty: Medium
Est time: <1 minute
76. When a convertible security is issued, the issue price is usually _______
the current market price of the company's share.
A. well below
B. close to
C. well above
D. not related to
Difficulty: Medium
Est time: <1 minute
77. Which of the following is NOT an advantage for a company that issues
a convertible note?
A. A lower interest rate can be offered, compared with straight debt.

B. It offers a method of raising cheap funds for the time being.
C. A longer maturity can often be offered.
D. There is an increase in financial leverage upon conversion.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
78. A company is advised to issue convertible notes. They are advised of the
conditions applicable to the convertible note issue. Which of the
following conditions is incorrect?
A. The holder of the note has the right to convert the note into
preference shares.
B. Notes are generally available on a pro-rata entitlement to
shareholders.
C. Entitlements to convertible notes are generally not renounceable.
D. Notes are usually issued at a price close to the current share price at
the time of issue.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
79. Compared with straight debt, convertible notes may offer a company:
A. lower borrowing costs.

B. higher borrowing costs.
C. a chance to issue more shares at maturity.
D. the opportunity to reduce debt.
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
80. When a company wants to increase the marketability of a rights issue, it
may offer:
A. preference shares attached.

B. options attached.
C. convertible notes attached.
D. dividends attached.
Difficulty: Medium
Est time: <1 minute
81. When warrants are converted by a holder:
A. debt is decreased.
B. debt is decreased but equity also increases.
C. only the number of shares increases.
D. there is no impact on the company's capital structure.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
82. Which of the following is NOT an advantage for a company that sells a
company-issued option with a rights issue?
A. It may add to the marketability of the associated rights issue.

B. It reduces the necessity for the company to increase dividend
payments immediately.
C. If the holder of the option exercises the right to buy the shares
offered then the company raises additional equity funds.
D. There is no certainty that the future funds from the exercise of the
option will eventuate.
Difficulty: Medium
Est time: <1 minute
83. Which of the following about equity warrants is NOT correct?
A. Adding equity warrants to a bond issue increases its marketability.

B. Warrants are similar to conversion features on some bonds.
C. Warrants can be detached from the bond issue and sold separately.
D. Dividends for warrants are usually lower than for ordinary shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. Which financial instrument gives the holder an option to purchase a

specified number of shares at a predetermined price over a given
period?
A. An equity warrant
B. A put option
C. An ordinary preference share
D. A debenture
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
85. Which one of the following conditions for an equity warrant that is
generally attached to a bond issue is NOT correct?
A. The holder has a conditional option to convert into ordinary shares of

a company.
B. A warrant holder receives dividend payments over the life of the
warrant.
C. Warrants may be detachable and traded separately from the bond
issue.
D. The cost of borrowing through a bond issue may be lower with a
warrant attached.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
86. Which of the following about equity warrants is NOT correct?
A. If the warrant is non-detachable it can only be sold with the

associated bond.
B. Equity warrants add to the marketability of a corporate bond issue.
C. Equity warrants give an investor the right to convert the warrant into
shares at a specified price.
D. A warrant holder receives a dividend, unlike a rights holder.
Difficulty: Medium
Est time: <1 minute
87. Which of the following statements about company-issued equity

warrants is incorrect?
A. The terms of a warrant may allow the warrant to be detachable from

the bond issue.
B. A company-issued equity warrant generally attaches to a bond issue.
C. Because company-issued equity warrants are attached to a bond they
have no value.
D. Warrants may lower the costs of borrowing associated with the issue
of the underlying corporate bond.
Difficulty: Medium
Est time: <1 minute
88. Which of the following is NOT a similarity between a right and a

warrant?
A. They both provide the right, without the obligation, to purchase a

specified number of shares at a predetermined price.
B. A right and a warrant both result in the company raising additional
equity capital.
C. A right and a warrant can both be detached from the debt issue and
traded separately.
D. A right and a warrant both have similar maturities.
Difficulty: Medium
Est time: <1 minute
89. Which of the following requirements does NOT apply to a company

seeking a public listing on the ASX?
A. The entity must satisfy either the profit test or the net tangible assets
test.
B. The company must have at least 500 holders of a parcel of main class
securities valued at least $2000.
C. The company must lodge a prospectus with the ASX on an annual
basis.
D. The company must have a structure and operation appropriate for a
listed entity.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 5.6 Explain the listing requirements of the Australian Securities Exchange.
90. The internal relationship between shareholders, the board of directors

and the managers of a company is called:
A. agency theory.
B. corporate governance.
C. commercial theory.
D. organisational governance.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
91. A principal objective of a business organisation is the maximisation of

its profits.
FALSE
A principal objective is the maximisation of shareholder value within
the context of the company's objectives and policies.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
92. The investment decision for a corporation involves the types of
securities it is going to issue or invest in.
FALSE
The investment decision is the capital budgeting decision that
determines the strategic activities of the firm and what assets it needs to
acquire so it can carry out its business.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93. If the calculated IRR on an investment proposal is greater than the

required rate of return, the company should proceed with the project.
TRUE
The IRR provides an actual rate of return that can be measured against a
company's required rate of return.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
94. Business risk is determined in part by a corporation's choice of business

activity and the manner in which it has financed those activities.
FALSE
Business risk represents a company's exposure to factors that have an
impact on the firm's activities and operations but it does not include the
manner in which it finances its activities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
95. A low debt-to-equity ratio for a company means that a rise in interest
rates will not affect the variable-rate debt issued by the company.
FALSE
As the debt has a variable interest rate it will be affected by an increase
in interest rates.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. Financial risk refers to risks arising from the different types of debt
securities issued by a company.
FALSE
Financial risk attaches to both equity and debt issued by a company.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. A company's debt-to-equity ratio is determined in practice with

reference to four main criteria and not by finance theory.
TRUE
Four main criteria are norms in the industry, history of the gearing ratio,
limits imposed by lenders and management decisions.
Difficulty: Easy
Est time: <1 minute
98. In consultation with a company, the promoter (an investment bank) will
seek flotation of the company shares.
FALSE
The promoter is the company seeking to issue new shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
99. Limited liability shares are generally sold to investors on a fully paid
basis.
TRUE
Ordinary shares issued on a limited liability basis are the principal form
of funding.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
100. A pro-rata offer of rights to existing shareholders must be accompanied

by a prospectus.
TRUE
Generally, regulations require a prospectus to be attached.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
101. What is capital budgeting and explain its importance for a company.
Capital budgeting is the process of evaluating and selecting long-term

investments consistent with the firms' goal of owner-wealth
maximisation. A company needs to determine what assets it needs to
invest in so it may carry out its planned business operations. Two
important quantitative measures it may use are net present value and
internal rate of return.
Bloom's: Knowledge
102. Discuss relevant issues for a company that needs to decide on how to
finance its investment decisions.
The financing decision relates to the question of how a business

investment is to be funded. There is the choice of debt or equity and
what kind of risk this exposes the firm to. These generally entail
business risk and financial risk.
Bloom's: Knowledge
103. A stock exchange seeks to maintain the integrity and efficiency of its
markets. Discuss some ways it may achieve this.
A stock exchange needs to establish listing rule principles that include

the interests of listed companies, combined with investor protection.
With regard to the stock exchange, some main principles are minimum
standards of quality and size, securities issued in a fair manner, timely
release of information, high standards of integrity and accountability of
entities and officers, and practices adopted and pursued that protect the
interests of security holders.
AACSB: Ethical
104. Discuss the attractions of a private placement for a company.
There are a number of advantages—a placement can be arranged more

quickly than a rights issue; it may also involve less of a discount to
current market value than a rights issue and so be less expensive. A
placement may also be made directly with institutions without the need
to lodge a prospectus but rather a less comprehensive and less costly
memorandum of information.

105. What is an equity-funded takeover?
In the case of a merger or acquisition, a company may decide to issue

additional shares to fund a full-equity takeover rather than using other
sources of funding such as debt. A company (A) may offer these shares
on a pro-rata basis to existing shareholders in the takeover target,
company (B). The target shareholders may be offered two shares in
company A for every five shares they hold in company B. The pro-rata
basis of the offer will be based on the value of company A shares
compared to that of company B.
Chapter 6
1. Passive investment means building a portfolio of shares based on the strategy of:
A. buy and hold.
B. replicating a market
index.
C. following solely the advice of share brokers.
D. investing in low-risk
shares.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 6.1 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are
available and understand risks associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

2. Investors buy listed shares:
A. to obtain fixed dividend payments.
B. to obtain fixed capital

growth.
C. for the chance of capital growth

only.
D. for the chance of dividend payments and capital

growth.
3. Typically, a large stock exchange has ________ listed on it.
A. preference
shares
B. shares
C. exchange-traded
funds
D. all of the given
choices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. Compared with fixed interest securities, shares offer:
A. capital gain for lower

risk.
B. capital gain for higher risk.
C. fixed dividends and capital gains for lower risk.
D. periodic dividends and capital gains at higher risk.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. A diversified portfolio generally includes:
A. 0-5
stocks.
B. 5-10
stocks.
C. 10-15
stocks.
D. 10-25
stocks.
Difficulty: Medium
Est time: <1 minute

6. According to the text, an investment portfolio that is well-diversified contains:
A. a large range of term

deposits.
B. a large number of
properties.
C. a large number of future

contracts.
D. a large range of shares, fixed-interest securities and

properties.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

7. Systematic risk means:
A. risks that have an impact on all technology

shares.
B. risks that have an impact on all energy

shares.
C. risks that have an impact on all financial

shares.
D. risks that have an impact on the majority of shares in the

market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

8. The risk that impacts specifically on the share price of a particular company is
called:
A. economic
risk.
B. business
risk.
C. systematic risk.
D. unsystematic risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

9. Which of the following is an example of systematic risk exposures for a company?
A. Resignation of chief
executive
B. Change in future performance

forecasts
C. Rumour of financial difficulty in the company
D. Introduction of new company

legislation
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

10. Which of the following is an example of an unsystematic risk exposure for a
company?
A. A change in interest
rates
B. A change in foreign exchange

rates
C. Political instability in a country
D. Change in future performance forecast for a

company
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

11. When investors buy and sell shares based on receiving new information on shares
and markets, this is known as:
A. active
investment.
B. a diversified
strategy.
C. a market replication
strategy.
D. passive
investment.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

12. To track the S&P500, a fund manager can buy:
A. all the stocks in the S&P500.
B. an S&P500 index
fund.
C. a percentage of stocks that essentially tracks the index.
Difficulty: Medium
Est time: <1 minute
13. Which of the following about share market indices is NOT correct?
A. The FTSE 100 index tracks 100 shares in the

UK.
B. The Nikkei 225 index tracks 225 shares in
Japan.
C. The Hang Seng index tracks shares in Hong Kong.
D. The Dow Jones tracks 50 shares in the USA.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. The correlation of pairs of securities within a portfolio is called:
A. co-association.
B. correspondence
.
C. covariance
.
D. variance
.
Difficulty: Medium
Est time: <1 minute
15. The correlation between two shares:
A. can take on positive

values.
B. can take on negative values.
C. is related to the covariance of a share.
D. includes all of the given

answers.
Difficulty: Easy
Est time: <1 minute
16. For a portfolio of stocks, portfolio risk is heavily based on:
A. a simple average of the variance of the stocks in the

portfolio.
B. a weighted average of the variance of the stocks in the

portfolio.
C. a weighted average of the covariance of the stocks in the

portfolio.
D. the standard deviation of the

stocks.
Difficulty: Medium
Est time: <1 minute

17. When an investor alters the mix of their portfolio to reflect market changes or their
circumstances, this is called _____ asset allocation.
A. market
timing
B. passiv
e
C. non-
fixed
D. tactica
l
Difficulty: Medium
Est time: <1 minute

18. For an investor, the mix of shares that satisfies their known cash-flow
requirements, risk tolerance and future life cycle positions is called:
A. tactical asset
allocation.
B. strategic asset
allocation.
C. systematic asset allocation.
D. diversified asset allocation.
Difficulty: Easy
Est time: <1 minute

19. Stockbrokers act as _____ for an exchange.
A. agents
B. dealer
s
C. negotiator
s
D. intermediaries
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.2 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares
20. Major differences between a discount stockbroker and a full-advisory stockbroker

lie in:
A. the level of fees.

B. the amount of advice
given.
C. the quantity of share recommendations.
Difficulty: Easy
Est time: <1 minute
21. Which of the following does NOT apply to full-advisory stockbrokers?
A. Full-advisory stockbrokers provide investment advice on listed securities.
B. Full-advisory stockbrokers monitor investors' financial

plans.
C. Full-advisory stockbrokers accept buy and sell orders from

clients.
D. Full-advisory stockbrokers' fees are competitive with
discount brokers.
Difficulty: Easy
Est time: <1 minute
22. When an investor purchases units in a unit trust, this is known as ________
investing.
A. absolut
e
B. direc
t
C. indirect
D. value
Difficulty: Medium
Est time: <1 minute
23. When a share investor puts an order to buy shares through their stock broker via
their internet share account, this is called:
A. indirect
investment.
B. direct investment.
C. index investment.
D. passive
investment.
Difficulty: Medium
Est time: <1 minute

24. Which of the following statements regarding dividends is incorrect?
A. Dividends are usually received twice yearly from a

company.
B. The payments of dividends are at the company board of directors'

discretion.
C An investor is generally required to pay taxation on the final

. dividend payment.
D. The taxation of dividends varies from country to

country.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 6.3 Understand the importance of taxation in the investment decision process.
Section: 6.3 Taxation

25. Which of the following statements is NOT correct?
A. In Australia taxation of individuals is based on a progressive tax

system.
B. The dividend imputation system effectively removes the double

taxation of dividends in Australia.
C In relation to dividend imputation, a shareholder whose marginal

. tax is lower than the company tax rate will pay their marginal tax
on the dividend received.
D In Australia dividends on which the company has already paid

. company tax are called franked dividends.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

26. The capital structure of a company is one of the important indicators of
performance. Which of the following statements regarding capital structure is
incorrect?
A. Debt to equity or shareholders' interest ratios are both measures of capital

structure.
B. Capital structure ratios are an indicator of longer term viability and

stability.
C. A company with a higher equity ratio is less dependent on

external funding.
D The capital ratios of companies, and industry groupings, are

. generally similar.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.4 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

27. When using indicators for a company's performance:
A. ratios for a company should be compared with others in the same

industry.
B. a single ratio should not be used to judge the company's overall

performance.
C. the dates of the financial statements being compared should be

the same.
Difficulty: Medium
Est time: <1 minute

28. Compared with a company's current ratio, the shareholders' interest ratio gives
information about a company's:
A. interest expense.
B. level of
liquidity.
C. long-term
viability.
D. future
earnings.
Difficulty: Medium
Est time: <1 minute

29. Which of the following are current assets?
A. Accounts
payable
B. Bank overdraft facility
C. Commercial paper
D. Inventories
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. Which of the following are current liabilities of a company?
A. Accounts
receivable
B. Inventories
C. Bank overdraft facility
D. Cash
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. The greater the proportion of debt financing compared with equity financing for a
company the:
A. lower the future earnings prospects for the

company.
B. greater the ability of the company to meet its interest

payments.
C. greater the degree of financial risk for the

company.
D. lower the expected earnings per
share.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
32. A company with a _____ ratio of equity to debt is _________ dependent on

external financing.
A. lower; less
B. lower;
not
C. higher;
less
D. higher;
more
Difficulty: Medium
Est time: <1 minute
33. The _______ ratio measures the proportion of total assets provided by the
company's owners.
A. shareholders' interest
B. total asset turnover
C. equity
turnover
D. debt
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
34. The indicator ratio that should be used to assess a company's ability to meet its
short-term obligations is its:
A. liquidity
.
B. debt.
C. profitability
.
D. capital structure.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

35. Which ratio is a measure of liquidity that excludes inventories?
A. Current
B. Liquid
C. Debt to gross cash

flow
D. Interest cover
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

36. An example of a liquidity ratio for a company is:
A. a fixed asset
turnover.
B. current ratio.
C. earnings per
share.
D. share price to net tangible assets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

37. A company has a higher current ratio than the industry average. This implies that
the company:
A. has a higher P/E than other companies in the

industry.
B. is more likely to avoid insolvency in the short term than other

companies in the industry.
C. may be more profitable than other companies in the

industry.
D. operates with a much lower level of inventory than others in

the industry.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

38. If a company has a current ratio of 2, which of the following measures will
increase the current ratio?
A. Buying more inventory on short-term

credit
B. Buying more inventory with

cash
C. A customer paying an overdue

account
D. Paying off a short-term bank advance with long-term

debt
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

39. If a company has a current ratio of 0.9, in order to improve its current ratio it
might:
A. increase its current assets by decreasing its

inventory.
B. use more long-term debt to decrease current

liabilities.
C. decrease its large amounts of accounts

receivable.
D decrease its large amount of accounts to pay to increase its

. current liabilities.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

40. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might:
A. increase its current assets by increasing its

inventory.
B. use more short-term debt to decrease current liabilities.
C. increase its large amounts of accounts receivable to improve its

cash position.
D increase its large amount of accounts to pay to decrease its

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

41. The ________ ratio is an indicator of the longer term viability and stability of a
company.
A. shareholders' interest
B. P/
E
C. EBIT/total funds
D. liquidit
y
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
42. For a company, a rule of thumb for the interest cover financial ratio is in the range:
A. 0 to
1.
B. 1 to
2.
C. 2 to
3.
D. 3 to
4.
Difficulty: Medium
Est time: <1 minute
43. Which financial ratio provides information essential for assessing the long-run
operation of the company?
A. Deb
t
B. Liquidity
C. Profitabilit
y
D. Share
price
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. The financial ratio that indicates the number of years required for a company to
repay its total debt is:
A. debt to
equity.
B. debt to
depreciation.
C. debt to gross cash

flow.
D. debt to net cash
flow.
Difficulty: Medium
Est time: <1 minute
45. The financial ratio that measures operating profit after tax to shareholders funds is:
A. EBIT to long-term
funds.
B. Return on
equity.
C. EBIT to total funds.

D. interest
cover.
Difficulty: Medium
Est time: <1 minute
46. Compared with a company's interest cover ratio, earnings before interest and tax
measures its:
A. amount of earnings for dividend payments.
B. expected
earnings.
C. profitability
.
D. return on
equity.
Difficulty: Medium
Est time: <1 minute
47. Which of the following groups of financial ratios provide information on the short-
run operation of the company?
A. Capital structure and debt

servicing
B. Capital structure and profitability
C. Debt servicing and

profitability
D. Liquidity and
profitability
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
48. Which financial ratio links long-term funds provided by the company's owners and
those of the creditors?
A. Deb
t
B. Debt to equity
C. Times interest
cover
D. Earnings to
price
Difficulty: Medium
Est time: <1 minute
49. Which financial ratio is used to measure a company's ability to meet its short-term
financing?
A. Deb
t
B. Liquidity
C. Capital
structure
D. Profitabilit
y
Difficulty: Medium
Est time: <1 minute
50. Which financial ratio measures a company's ability to service its interest
commitments?
A. Deb
t
B. Equity to debt
C. Profitabilit
y
D. Interest cover
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51. The higher the value of the _______ ratio, the better able the firm is to meet its
short-term financial obligations.
A. debt to equity
B. liquidit
y
C. earnings per
share
D. EBIT to long-term
funds
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
52. The _______ is an indicator of investors' evaluation of a company's future earnings

potential.
A. debt to equity
ratio
B. price/earnings ratio
C. interest cover ratio
D. return on shareholders' funds

AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
53. The following is a simplified financial position statement for a company:
Assets $ Liabilities $
Cash 250 000 Accounts payable 1 480 000
Trading securities 350 000 Accrued expenses payable 420 000
Accounts receivable 1 360 000 Taxes payable 140 000
Inventory 2 470 000 Long-term debt 3 850 000
Property 3 350 000 Shareholders' funds 2 340 000
Equipment 450 000
Calculate the liquidity ratio.
A. 0.85
B. 0.96
C. 1.51
D. 1.32
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

54. Which of the following statements regarding the debt servicing capacity of a
company is incorrect?
A. The debt to gross cash flow ratio is an indicator of debt servicing

capacity.
B. The debt to gross cash flow ratio indicates years required for cash
flows to repay total debt.
C. The interest cover ratio is an indicator of a company's capacity to

service debt.
D The lower the interest cover ratio, the greater the company's
. ability to cover interest commitments.
Difficulty: Medium
Est time: <1 minute

55. If a share currently sells for $20 and has annual earnings per share of 8.0, the
price/earnings ratio is:
A. 0.4
B. 2.5
C. 4.0
D. 160
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
56. The _______ ratio is an indicator of the share market's evaluation of a company.
A. debt/equity
B. price/earnings
C. debt to gross cash flow
D. shareholders' interest
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
57. Systematic risk is also referred to as:
A. economic
risk.
B. diversifiable risk.
C. market
risk.
D. financial risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
58. The risk that affects the whole market is called:
A. total
risk.
B. systematic risk.
C. diversifiable risk.
D. financial risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

59. In modern portfolio theory, investment risk is divided into two components:
systematic risk and unsystematic risk. Which of the following risks is an example
of systematic risk?
A. Increase in the corporate tax

rate
B. Productivity and cost of

labour
C. The effectiveness of the management of the

company
D. Gearing and the impact of interest rate changes
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

60. Increased competition, increased costs of labour, lawsuits, and unfavourable
exchange rates are all examples of:
A. diversifiable risk.
B. systematic risk.
C. total
risk.
D. economic
risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. Which of the following is NOT an example of unsystematic risk for a company?
A. The company announces a merger with a

competitor.
B. The chief financial officer resigns.
C. The company loses competitiveness relative to other

companies.
D. Changes occur in the level of company tax

rates.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. Estimating systematic risk involves comparing the price history of a particular
share relative to movements on_____ stock listed on an exchange.
A. an average
B. the median
weighted
C. the most volatile

D. the least volatile
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. The higher the beta of a share the:
A. greater the systematic risk.
B. lower the systematic risk.
C. lower the expected

return.
D. less responsive it is to changing share market

movements.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
64. Which of the following about beta coefficient is incorrect?
A. A stock of beta 1.25 indicates the share price will perform 25% better
than the overall market when prices are rising.
B. A stock of beta 1.25 indicates the share price will perform 25% worse
than the overall market when prices are falling.
C. A stock with a beta of 1.25 will move more than a stock with a
beta of 1.25.
D A stock with a beta of 0.50 will rise at only half the rate at
. which the overall market index will rise.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
65. What should be the price of a share that constantly pays $2.50 annually in
dividends, if the growth rate is zero and the required rate of return is 8% per
annum?
A. $22.86
B. $28.00
C. $31.25
D. $33.75
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.5 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

66. What should be the price of a share if it paid $1.75 in dividends in the last financial
year, its dividend growth rate is 4%, and the required rate of return is 11%?
A. $25.00
B. $26.00
C. $30.28
D. $43.75
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
67. The majority of companies pay dividends twice a year to their:
A. bond
holders.
B. secured bond holders.
C. shareholders.
D. board of directors.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. When a share goes ex-rights, assuming everything else remains the same, its price
should:
A. increase, as the company no longer has the right to make the shareholder
convert.
B. decrease, as the shareholder is losing an

option.
C. remain the same, as the market knows about it in

advance.
D. increase, as a successful rights issue will raise a large amount
of cash.
Difficulty: Medium
Est time: <1 minute
69. After a company has made an announcement about a forthcoming dividend, then at
a specified date when the share begins to trade ex-dividend:
A. the buyer of the share will now receive the due dividend.
B. the share price will adjust upwards by the amount of the forthcoming
dividend.
C. the seller of the share will receive the next dividend

payment.
D the ex-dividend share price will be unaffected by the
. forthcoming dividend.
Difficulty: Medium
Est time: <1 minute
70. When a share is trading for a period with a cash dividend entitlement, then the
share is said to trade:
A. bonus
dividend.
B. pro
dividend.
C. cum-dividend.
D. ex-
dividend.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
71. If a dividend is declared on 1 November, has a cum-dividend date of 19 November

and a record date of 26 November, which of the following shareholders will NOT
receive the dividend?
A. A buyer of the share on 31

October
B. A buyer of the share on 11

November
C. A buyer of the share on 26

November
D. A buyer of the share on 29
November
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
72. On the day that a share goes ex-dividend, the price should theoretically:
A. increase by the extent of the dividend.
B. decrease by the extent of the dividend.
C. decrease by a small fraction of the

dividend.
D. remain constant.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. The decision to pay cash dividends to shareholders is made by the:
A. company
management.
B. shareholders at the annual

meeting.
C. board of directors.
D. bond
holders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

74. A company declares a dividend of 35 cents per share, which was payable on 14
September. Immediately prior to the declaration of the dividend, the share price
was $4.79. At the close of trading on the stock exchange on 13 September, the
share price was $5.44. What is the theoretical ex-dividend price of the share?
A. $4.44
B. $4.79
C. $5.09
D. $5.79
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

75. A rights issue differs from a bonus issue of shares in that:
A. after a bonus issue there is a greater number of shares in existence, unlike

rights.
B. shares that are cum-bonus are

renounceable.
C. the purpose of a bonus issue for a company is not to raise more

funding.
D. only listed companies have rights

issues.
Difficulty: Medium
Est time: <1 minute

76. Which of the following statement about bonus shares is NOT correct?
A. Bonus shares are generally issued at no cost to the

shareholders.
B. If a company offers a 1 for 4 bonus issue this means for every 1 share
a shareholder owns they get four extra shares.
C When shares go ex-bonus there should be a downward adjustment

. in the share price.
D If a company declares a bonus share issue this can be viewed

. by the market as a positive signal about the company's future
profitability.
Difficulty: Medium
Est time: <1 minute

77. When shares are purchased cum-rights it means the purchaser of the share:
A. cannot usually sell the right

separately.
B. may take part in the rights

offer.
C. cannot take part in the rights

offer.
D can take up the offer of the right without having to pay extra
. for the subscription price.
Difficulty: Medium
Est time: <1 minute

78. If a company offers a one-for-five bonus issue and the current share price cum-
bonus is $7.50, the theoretical value of each share ex-bonus is:
A. $7.50
B. $6.25
C. $6.00
D. $5.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
79. A company whose share is selling for $24 announces a stock split of four-for-three.
Which of the following statements is correct?
A. There will be four times as many shares on issue and they will sell for
$96.
B. There will be three times as many shares on issue, and they will sell
for $8.
C. There will be one-third more shares on issue and they will sell
for $18.
D There will be three-quarters more shares on issue and they

. will sell for $32.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
80. A company whose shares are currently trading at $3.60 proposes to have a 25%
split; that is, four new shares for one existing share. At the commencement of the
next business day, a dividend of 25 cents is paid on existing shares, followed
immediately by the share split. What is the theoretical price of the new shares?
A. $0.72
B. $0.90
C. $2.70
D. $3.35
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
81. Share market participants can regard a bonus issue favourably because:
A. bonus issues represent a change in the total assets of a

company.
B. bonus issues increase the equity/debt ratio of a company, and so

reduce financial risk.
C. they take it as a signal from the company of increased future

profitability.
D bonus issues increase the number of shares in an investor's
. portfolio and hence their total value.
Difficulty: Medium
Est time: <1 minute
82. An investor holds 100 shares of a company that is about to make a bonus issue of
five shares for every two held. If the shares are currently trading for $2.50, what
will be the value of the holding after the bonus issue?
A. $200
B. $250
C. $400
D. $500
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
83. The current market price of a stock is $3.00. The rights issue is one-for-ten, priced
at $2.80. Calculate the theoretical ex-rights price.
A. $1.96
B. $2.85
C. $2.98
D. $3.05
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
84. Which of the following is an aim of a stock split?
A. To increase the number of shares on issue and so affect the capital

structure
B. To reduce the dividend

payments
C. To increase the share

price
D. To try to improve the liquidity of

shares
Difficulty: Hard
Est time: <1 minute

85. There is ________ change in the capital structure of a company after a share split.
A. a measurable
B. a small
C. no
D. an adverse
Difficulty: Easy
Est time: <1 minute

86. Share market participants can regard a rights issue favourably because:
A. a rights issue does not affect the capital structure of a

company.
B. a rights issue increases the equity/debt ratio, and so reduces financial

risk.
C they can participate in the rights issue without having to pay the
. subscription price.
D. rights issues increase the value of shares in an investor's

portfolio.
Difficulty: Medium
Est time: <1 minute

87. When a share price of a company has increased hugely compared to the prices of
most other shares on the exchange and its liquidity has decreased, the directors
may decide to:
A. split the number of shares on

issue.
B. have a bonus issue.
C. declare an increased dividend.
D. lower the dividend.
Difficulty: Medium
Est time: <1 minute
88. The S&P/ASX All Ordinaries share price index represents:
A. changes in aggregate share market values of the largest 500

companies.
B. movements in the Australian share market relative to international
markets.
C. the historical capitalisation of the 100 largest corporations.
D. changes in share market value, including dividend

reinvestment.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.6 Analyse the functions and importance of share-market indices and interpret published share-market information.
Section: 6.6 Stock-market indices and published share information
89. According to the text, a tradable benchmark:
A. is a broad market index that represents 90% of the share market

capitalisation.
B. may be a performance benchmark index but with a narrower focus

upon which some derivative contracts are priced.
C. is a broad market index that represents 99% of the share market

capitalisation.
D is an index that measures changes in share prices plus
. reinvestment of dividends.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 6.6 Analyse the functions and importance of share-market indices and interpret published share-market information.
Section: 6.6 Stock-market indices and published share information
90. Consider the following five statements:
i. The expected return of a portfolio of shares is the weighted average of the

expected returns for each share.
ii. All other things being equal, a cum-dividend share price should fall by the
amount of a dividend that is paid.
iii. One of the effects of dividend imputation is the removal of ‘double taxation' of
company profits that are distributed as dividends.
iv. For a shareholder with a marginal tax rate that is lower than the company tax
rate, no tax will be payable on the fully franked dividend received, and the excess
credit can be applied against other assessable income.
v. In a one-for-nine bonus issue, if the cum-bonus price was $10, then the
theoretical ex-bonus price would be $9.
How many of the above statements are true and how many are false?
A. 3 statements are true and 2 are false
C. 4 statements are true and 1 is false
D. 1 statement is true and 4 are false
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

i. The expected return of a portfolio of shares is the weighted average of the

expected returns for each share.
ii. All other things being equal, a cum-dividend share price should fall be the
amount of a dividend that is paid.
iii. One of the effects of dividend imputation is the removal of ‘double taxation' of
company profits that are distributed as dividends.
iv. For a shareholder with a marginal tax rate that is lower than the company tax
rate, no tax will be payable on the fully franked dividend received, and the excess
credit can be applied against other assessable income.
v. In a one-for-nine bonus issue, if the cum-bonus price was $10, then the
theoretical ex-bonus price would be $9.
Which of the following is correct?
A. i, ii, iii are true and iv and v are

false
B. i, and iii are true and ii, iv and v are false
C. i, ii, iii and iv are true and v is false
D. i and ii are true and iii, iv and v are false
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

92. Continuous disclosure rules of a stock exchange mean that listed companies must
disclose any material information continuously every hour.
FALSE
Material information must be disclosed to the stock exchange immediately.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93. Efficient price discovery means that share information is disclosed at the lowest
possible transactions cost.
FALSE
Efficiency here means how quickly the relevant information is incorporated into
the share price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
94. A change in foreign exchange rates is a systematic risk that affects the bulk of
shares listed on a stock exchange.
TRUE
Systematic risk involves exposures that affect the majority of shares listed on a
stock exchange.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

95. A share that has a beta of 0.5 is half as risky as the average share listed on the share
market.
TRUE
The beta for the overall share market is 1.0.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. Passive investment involves building an investment portfolio based on shares that
are less risky than the overall share market.
FALSE
Passive investment means a portfolio formed by replicating a specific share-market

index.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. If two assets are negatively correlated this means their prices move in opposite
directions.
TRUE
Positive correlation means the two prices move together in the same direction.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

98. If investors alter the mix of shares in their portfolios as the share market suddenly
falls they are using a strategic asset allocation approach to investing.
FALSE
Strategic asset allocation means a distribution of assets based on an investor's

preference for physical and financial assets.
Difficulty: Medium
Est time: <1 minute
99. A company's ability to meet short-term financial obligations is an important

financial performance indicator for an investor.
TRUE
A company will have a mixture of debt and equity and the company must have
enough funds on hand to meet its debt payments and other commitments.
Difficulty: Easy
Est time: <1 minute
100. Historically, Australian banks have had low EPS ratios compared with the retail
sector because of the amount of lending they do.
FALSE
According to the text, Australian banks have had very high earnings per share
ratios.
Difficulty: Medium
Est time: <1 minute

101. When a share is trading cum-dividend, this means the seller of the share will
receive the dividend payment.
FALSE
The buyer of the share trading cum-dividend will receive the dividend up to the
specified record date after which it trades ex-dividend.
Difficulty: Medium
Est time: <1 minute
102. What are some factors that influence investors to buy listed rather than unlisted
shares?
Some factors that encourage investors to buy shares quoted on an exchange are
efficient price discovery that includes share market listing rules such as continuous
disclosure and other investor protection rules, and depth and liquidity of share
markets.
103. Explain the concept of a diversified portfolio.
Under investment theory, an investor who holds a diversified portfolio is able to

minimise the risk exposure from investing in a single share. A diversified portfolio
would include a range of investment categories including shares, fixed-interest
securities and property so that unsystematic risk is diversified away.

104. Explain how an index fund might benefit an investor.
If an investor wishes to build a portfolio based on tracking a share index they might
consider index funds. Index funds use a range of techniques to replicate or track the
share market, including full or partial replication of a specified share-market index.
Full replication occurs when a share manager purchases all the stocks included in
an index. For indexes that contain a large number of stocks such as the S&P 500 a
manger may partly replicate the index.
105. Define and explain what a share split involves.
A share split is a proportional division of the number of shares issued by a

company. A share split may be motivated by a company's share price increasing
significantly over time and possibly being seen as too expensive for some
investors. The directors may be motivated to split the shares in, for example, a 20
per cent split that results in five new shares for one existing share. However, there
is no fundamental change in the asset value of the company.
106. What is a stock-market index? Discuss three main types.
A stock-market index is a measure of the price performance of the share market or

some section of it. Three main types are performance benchmark indices, tradeable
benchmark indices and market indicator indices. A performance benchmark index
measures the performance and risk of a broad market based on capitalisation and
liquidity; a tradable benchmark index is a narrower index and is the basis on which
some derivative contracts are priced, and a market indicator index measures the
performance of the overall market such as the Dow Jones Industrial Average
(USA).
Chapter 8
1. The term ‘simple', with regard to interest, refers to the fact that:
A. the interest calculation is easy to work out.
B. principal repayment is
guaranteed.
C. interest payments are
guaranteed.
D interest is calculated on the

. initial principal only.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 8.1 Understand and carry out a range of simple interest calculations.
Section: 8.1 Simple interest
2. If you invest $1600 for a year at 6.8% per annum simple interest, how
much interest will you earn?
A. $10.80
B. $108.00
C. $1088.00
D. $1708.80
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
3. If you borrow $100 000 for 90 days with simple interest of 6.2% per
annum, what is the total amount of interest paid on the loan?
A. $1528.77
B. $6200.00
C. $620.00
D. $15 287.67
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

4. If you invest $7500 for a year at 7.4% per annum simple interest, what is
the value of your investment at the end of the year?
A. $555.00
B. $5550.00
C. $8055.00
D. $13 050.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
5. If you invest $1200 for two years at 6.9% per annum simple interest,
what is the value of your investment at the end of the two years?
A. $165.60
B. $1365.60
C. $1656.00
D. $2856.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
6. If you invest $13 500 for 18 months at 6.9% per annum simple interest,
what is the value of your investment at the end of the 18 months?
A. $14 431.50
B. $14 897.25
C. $21 647.25
D. $22 815.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
7. What is the future value of $12 000 on deposit for four years at 7.00% per
annum simple interest?
A. $3360.00
B. $12 336.00
C. $15 360.00
D. $15 729.55
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

8. What is the present value of $1 million payable in 90 days at 8.00% per
annum simple interest?
A. $835 240.27
B. $974 372.66
C. $980 655.56
D. $1 002 747.25
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

9. If you invest _______ to earn simple interest of 6.8% per year, you will
receive $12 375 at the end of two years.
A. $4759.62
B. $5156.25
C. $9728.77
D. $10 893.49
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
10. The market convention to use a 360-day year in the financial markets
applies in:
A. the United Kingdom.

B. Australia.
C. the United Kingdom and

euromarkets.
D. the United States and

euromarkets.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
11. If a company sells (discounts) a bank bill with a face value of $100 000, a
term to maturity of 90 days, and a yield of 7.23% per annum, how much
will the company raise on the issue? (Ignore transaction fees.)
A. $84 869.90
B. $98 248.49
C. $98 269.99
D. None of given
answers.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
12. If a company sells (discounts) a bank bill with a face value of $500 000, a
term to maturity of 120 days, and a yield of 8.45% per annum, how much
will the company raise on the issue? (Ignore transaction fees.)
A. $391 295.03
B. $445 312.02
C. $486 485.05
D. $486 302.48
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
13. When a company discounts a commercial bill to obtain funds, this means
the company:
A. issues a commercial
bill.
B. lends
funds.
C. buys a commercial
bill.
D. invests in commercial bills.
Difficulty: Medium
Est time: <1 minute
14. When a company sells a commercial bill, this means the company:
A. lends
funds.
B. lends a commercial bill.
C. issues a commercial
bill.
D. invests in a commercial bill.
Difficulty: Medium
Est time: <1 minute
15. When a company discounts a commercial bill, this means the company:
A. borrows funds.
B. buys a commercial
bill.
C. lends surplus funds.
D. invests in commercial bills.

Difficulty: Medium
Est time: <1 minute
16. A 90-day promissory note with a face value of $500 000 is issued at a
yield of 7.789% per annum. Calculate its price.
A. $379 971.77
B. $419 442.84
C. $490 578.08
D. $490
711.67
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

17. If the current yield on 180-day Treasury notes is 6.42% per annum, what
price per $100 of face value would an investor pay to purchase them?
A. $75.95
B. $96.93
C. $96.94
D. $99.98
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

18. If you receive $100 000 back as principal and interest at the end of the
year for an initial investment of $93 456 at the start of the year, what
interest has been earned on your investment?
A. 6.54
%
B. 65.4
%
C. 7.00
%
D. 70.00
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

19. If you receive $100 000 back as principal and interest for an investment
of $92 368 that you made six months earlier, what simple rate of interest
has been earned on your investment?
A. 7.63% per
annum
B. 15.48% per
annum
C. 16.16% per
annum
D. D.16.75% per annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

20. If you receive $10 000 back as principal and interest at the end of two
years for an initial investment of $9127 at the start of the term, what is the
yield on your investment?
A. 4.37% per
annum
B. 4.78% per
annum
C. 8.73% per
annum
D. 9.57% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

21. If your deposit of $30 000 becomes $30 919 at the end of 120 days, what
is the annual yield earned?
A. 9.04
%
B. 9.19
%
C. 9.23
%
D. 9.32
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

22. What is the simple annualised interest rate on a company transaction to
raise $100 000 financing by drawing a bank bill with a face value of $104
000, payable in 120 days?
A. 4
%
B. 12
%
C. 12.17
%
D. 12.67
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

23. A bank bill with a face value of $500 000 and 90 days to maturity is
purchased with a yield to maturity of 6.92% per annum. After the bill has
been held for 28 days, it is sold at a yield of 6.78% per annum. What is
the holding period yield for the holder of the note?
A. 3.23% per
annum
B. 7.11% per
annum
C. 7.15% per
annum
D. 7.51% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

24. A company invests its surplus funds by buying a commercial bill with a
face value of $100 000, at a current yield to maturity of 7.35% per annum
and 120 days to maturity. After 45 days, the bill is sold at a yield of
6.84% per annum. What rate of return did the company earn on the bill?
A. 4.85% per
annum
B. 8.01% per
annum
C. 8.09% per
annum
D. 8.90% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

25. When will a future value calculated with a simple interest rate exceed a
future value calculated with compound interest at the same rate?
A. When the interest rate exceeds 100% per annum
B. When the investment period exceeds 50

years
C. When the initial deposit exceeds $1

billion
D This is not possible with

. positive interest rates
Difficulty: Medium
Est time: <1 minute

26. The idea of compound interest refers to:
A. the payment of interest on previously earned

interest.
B. investing for multiple periods in one

year.
C. earning interest only on the initial

investment.
D changing interest rates during

. an investment.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 8.2 Understand and carry out important compound interest calculations.
Section: 8.2 Compound interest

27. If you borrow $11 000 for four years at an annually compounding rate of
8.2% per annum, what is the total interest on the loan if the interest due is
added to the principal over the period and repaid at the maturity date?
A. $2933.96
B. $3608.00
C. $3842.51
D. $4076.54
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

28. If your investment of $5000 with the bank carries a compound interest of
8.75% per annum, the value of your investment at the end of three years
is:
A. $1430.69
B. $6312.50
C. $6430.69
D. $5437.50
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

29. An $8000 bank deposit earning compound interest of 8.21% per annum
grows to _______ in 5.25 years.
A. $11
284.00
B. $12 058.14
C. $12 105.81
D. $16 019.15
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

30. What is the future value in six years of $10 000 invested today,
compounding at 6.87% per annum?
A. $14 122.00
B. $14 898.24
C. $15 128.26
D. $23 051.04
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
31. What is the future value in four-and-a-half years of $5000 invested today
at 9.50% compounded semi-annually?
A. $6161.17
B. $7522.00
C. $7592.00
D. $9875.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
32. If you borrow $20 000 for four years at an interest rate of 7.23% per
annum, with the interest compounding quarterly, how much will you have
to pay at the end of the period?
A. $21 485.68
B. $26 442.06
C. $25 784.00
D. $26 638.29
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
33. If you invest $12 000 for 4.75 years at 7.88% per annum, with interest
compounded monthly, what will your total investment be worth at the end
of the period?
A. $12 378.94
B. $15 476.29
C. $16 232.40
D. $17 426.34
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
34. If interest rates are 8.21% per annum, compounded annually, the present
value of $31 000 received at the end of three years is:
A. $2819.17
B. $9549.33
C. $24 465.80
D. $28 647.99
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
35. What is the price today of an investment that will pay the single sum of
$20 000 after three and a half years if the discount rate is 7.64% per
annum, compounded annually?
A. $2743.37
B. $15 456.89
C. $15 780.00
D. $16 036.48
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
36. You are considering an investment that will pay a lump sum of $50 000 at
the end of six years and you decide that 9% per annum compounded
monthly is an appropriate discount factor. What is the value of the
investment in today's dollar terms?
A. $31 508.48
B. $32 496.57
C. $31 934.98
D. $47 846.89
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

37. What is the present value of the following cash flow stream, discounted at
6.5% per annum, compounded monthly?
Year 1: $1000; Year 2: $1500; Year 3: $2000; Year 4: $2500
A. $5844.58
B. $5863.1
1
C. $5874.79
D. $5986.23
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

38. A finite stream of regular cash flows over a given period is known as
a/an:
A. perpetuity
.
B. annuity
.
C. debenture
.
D. allowance.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

39. The main difference between an annuity and an annuity due lies in the:
A. number of payments.
B. time of the first

payment.
C. interest
rate.
D. frequency of payments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. In regard to an annuity, if the first cash flow is made immediately, it

becomes:
A. a simple
annuity.
B. an ordinary
annuity.
C. an annuity
due.
D. the present value of an

annuity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
41. The present value of an annuity of $11 000, received at the end of every
year for ten years, where the required rate of return is 5.6% per annum,
compounded annually, is:
A. $6379.01
B. $7051.28
C. $8251.76
D. $82 517.62
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
42. The present value of an annuity of $800, received at the end of every
month for 20 years, where the required rate of return is 6.5% per annum,
compounded monthly, is:
A. $33 366.03
B. $43 367.94
C. $107 300.02
D. $192 000.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
43. The present value of an ordinary annuity of $1000 each year for six years,
assuming current market interest rates, is:
A. $1625.20
B. $2982.64
C. $4596.19
D. $4956.19
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
44. The present value of an ordinary annuity with equal monthly payments of
$300 over the next four years, assuming market interest rates are 12% per
annum, is:
A. $911.2
0
B. $1170.5
9
C. $11
392.19
D. $18 366.78
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
45. You take out a loan to buy a property and agree to pay $53 000 one year
from now, another $53 000 two years from now, and a final payment of
$53 000 three years from now. If your interest rate is fixed at 8.5% per
annum, compounded annually, calculate the value of the loan today.
A. $135 363.19
B. $139 426.13
C. $146 543.78
D. $157 515.25
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

46. A property investor receives rental payments of $1900 at the start of each
month for five years. If the required rate of return is 7.2% per annum,
compounded monthly, what is the value of the property investment
today?
A. $83 067.50
B. $90 092.50
C. $95 498.05
D. $96 071.04
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

47. If you make an investment and agree to pay regular monthly payments of
$450 at the end of the next twelve months, starting one month from
today, what is the present value of this investment if the interest rate is
8.4% per annum compounded monthly?
A. $3322.06
B. $4916.30
C. $5162.12
D. $5198.25
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

48. What is the current price of a financial security that pays a fixed coupon
of 10.2% per annum per $100 face value, compounding half-yearly and
maturing in four years, when current yields in the market are 8.6% per
annum?
A. $103.9575
B. $70.3185
C. $103.887
D. $132.8295
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

49. If the interest rate is 6.9% per annum, compounded annually, what is the
future value of a five-year ordinary annuity with yearly payments of
$4000?
A. $5584.04
B. $18 709.07
C. $22 957.10
D. $30 984.06
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

50. If the interest rate is 7.4% per annum, compounding quarterly, what is the
future value of a six-year ordinary annuity with quarterly payments of
$4000?
A. $28 903.12
B. $85 938.40
C. $62 647.89
D. $103 126.09
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

51. An investor plans to save $1000 per year for the next ten years as a
retirement fund, and expects to earn 8.4% per annum, compounded
monthly over the period, on all invested funds. How much will the
investor have at the end of ten years?
A. $187 085.48
B. $296 035.24
C. $126 882.77
D. $153 178.10
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

52. What is the current price of an existing debenture with a face value of
$1000 that pays a fixed coupon of 8.4% per annum, compounded
annually, and maturing in five years? Current yields in the market are
6.6% per annum.
A. $941.65
B. $999.96
C. $1016.26
D. $1049.54
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

53. What is the current price of an existing Treasury bond that pays a fixed
coupon of 6.4% per annum per $100 face value, compounding half-
yearly, and maturing in four years? Current market yields are 6.8% per
annum.
A. $22.0888
B. $44.1775
C. $76.5307
D. $98.6195
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

54. If you are saving for an overseas trip and put $400 every month into an
account paying 6.8% per annum, compounding monthly, how much will
you have at the end of 3.25 years?
A. $5014.43
B. $16 907.41
C. $17 001.84
D. $17 403.22
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

55. Calculate the effective annual interest rate corresponding to 9.6% per
annum, compounded monthly.
A. 10.03
%
B. 9.6
%
C. 8.0
%
D. 6.9
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

56. Calculate the effective annual interest rate if you are quoted 8% per
annum, compounded half yearly.
A. 8.27
%
B. 8.16
%
C. 8.0
%
D. 4.0
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

57. Calculate the effective annual interest rate if your bank quotes you 10%
per annum, compounded quarterly.
A. 14.01
%
B. 10.38
%
C. 10
%
D. 2.50
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

58. Calculate the effective annual interest rate if you are quoted 8% per
annum, compounded every three months.
A. 11.10
%
B. 8.24
%
C. 8.22
%
D. 8.00
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

59. If the effective annual interest rate is known to be 19.4% on a debt that
has quarterly payments, what is the annual percentage rate?
A. 19.40
%
B. 19.10
%
C. 18.13
%
D. 18.00
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

60. If the effective annual interest rate is known to be 16.0% on a debt that
has monthly payments, what is the annual percentage rate?
A. 16.00
%
B. 14.93
%
C. 12.45
%
D. 1.33
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

61. When a company obtains an interest-only business bank loan and is
required to make annual interest payments on the principal borrowed and
repay the full principal at the maturity date, the type of interest is called
simple interest.
TRUE
Simple interest is calculated on the principal only.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. The principal of a six-month bank deposit is the amount you receive at
the end of its term.
FALSE
The principal is the amount you originally deposited with the bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
63. The euromarkets, unlike those of the US, follow the market convention
that a per-annum rate relates to a 365-day year.
FALSE
Both the USA and the euromarkets follow the convention of a 360-day
year.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

64. Accumulation of final amounts under simple interest happens at a slower
rate than with compounding interest.
TRUE
As simple interest is calculated only on the principal it will grow at a

slower rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
65. The amount that an investor puts up initially for a commercial bill is
called the principal.
FALSE
The investor pays a discounted price to the principal that they will receive
back at maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
66. When a company issues a commercial bill it is said to discount it.
TRUE
The term discount comes about from how the interest rate is used in the
calculation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

67. When a holder of a commercial bill sells it before its maturity date the
return to the holder is called the holding period return.
TRUE
The holding period return is likely to be different from the return it would
fetch if it had been held to maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
68. If a commercial bill is sold into a market in which its yield works out
higher than the yield that prevailed at the original purchase date, a capital
gain would have been made.
FALSE
A capital loss would have been made as there is an inverse relation

between yield and price.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
69. If an investor purchases a commercial bill with a face value of $100 000
with a yield of 7.00% per annum and then, in 60 days, sells it at a yield of
6.70% per annum, the investor will make a capital loss on the sale of the
bill.
FALSE
When the investor sells it at the lower yield it means the price is higher.
So the investor actually makes a capital gain.
AACSB: Analytic
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute

70. If an investor purchases a commercial bill with a face value of $100 000
with a yield of 7.00% per annum and then, in 60 days, sells it at a yield of
7.50% per annum, the investor will make a capital gain on the sale of the
bill.
FALSE
When the investor sells it at the higher yield it means the price is lower.
So the investor actually makes a capital loss.
AACSB: Analytic
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
71. Explain the differences(s) between an interest rate and a rate of return.
The rate of return is the financial benefit gained from the investment of
savings. It is calculated by the ratio of net inflows to the cash outflows
produced by a financial instrument. An interest rate is used in place of
rate of return for debt financial contracts to represent the cost of funds for
the borrower.
Bloom's: Knowledge
72. Distinguish between simple interest and compound interest.
Simple interest is the method of calculating interest in which, during the

entire term of the loan, interest is calculated on the original amount
borrowed. Compound interest is when interest is calculated each period
on the principal amount and on any interest added to the principal amount
up to that point.
Bloom's: Knowledge

73. Distinguish between an ordinary annuity and an annuity due. Give
examples.
An ordinary annuity is made up of equal amounts, equally spaced in time.

In other words, the first cash flow occurs after one time period (i.e. at t =
1). An annuity due is an annuity for which the first cash flow is to occur
straight away (i.e. on the valuation date) and at the beginning of
subsequent periods.
Bloom's: Knowledge
74. In relation to interest rates, explain what a yield is.
A yield is an interest rate that is the return on an investment or the cost of

borrowing. In the context of investment it is the cash flow (or income)
that, when added to any capital loss or gain, gives the total return for an
investment.
75. If compounding of interest occurs more often than annually, explain how
you would compare three interest rates of the same amount: one that is
quoted annually, one semi-annually and one quarterly. At which rate
would you expect the same investment amount to grow the most over ten
years?
In order to compare interest rates that reflect a common frequency of

interest rate and compounding it is necessary to calculate an effective rate
of interest. The interest rate with the greatest frequency of compounding
will result in the greatest compounding effect—the quarterly rate.
Chapter 9
1. When a company finances its short-term assets with short-term debt, this
is known as the:
A. identical principle.
B. equalisation
theory.
C. corresponding
principle.
D. matching
principle.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 9.1 Understand why the financial markets offer short-term debt and financing facilities.
2. Trade credit can be regarded as:
A. finance offered by trading banks.
B. short-term
debt.
C. medium-term debt.
D. long-term debt.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 9.2 Consider the concept and reasons for the provision of trade credit.
Section: 9.1 Trade credit
3. According to the text, short-term debt arrangements means loans and

instruments with maturity:
A. of a
month.
B. up to six
months.
C. up to a
year.
D. between one year and two
years.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 9.1 Understand why the financial markets offer short-term debt and financing facilities.
4. When a company provides goods to a purchaser with payment at the end

of the month, this is called.
A. factoring.
B. revolving credit.
C. trade
credit.
D. supplier credit.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. A facility offered by many suppliers of goods that provide for the

purchase of goods with a specified period before the account must be paid
for is called:
A. supplier credit.
B. bank overdraft.
C. trade
credit.
D. purchaser credit.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. A 2/15, n/30 date of invoice translates as:
A a 2% cash discount may be taken if paid in 15 days; if no

. cash discount is taken, the balance is due in 30 days after
the middle of the month.
B a 2% cash discount may be taken if paid in 15

. days; if no cash discount is taken, the balance
is due 30 days after the invoice date.
C a 2% cash discount may be taken if
. paid in 15 days; if no cash discount is
taken, the balance is due 30 days after
the end of the month.
D a 2% cash discount may be

. taken on 15% of the purchase
if the account is paid within 30
days after the end of the
month.
Difficulty: Medium
Est time: <1 minute
7. The annual cost of forgoing a cash discount under the terms of sale 2/30
n/90, assuming a 365-day year is:
A. 8.0
%
B. 12.2
%
C. 12.4
%
D. 24.0
%
Difficulty: Medium
Est time: <1 minute
8. A company is offered credit terms of 2/10 n/40, but decides to forgo the
cash discount and pay on the 45th day. What is the company's cost of
forgoing the cash discount?
A. 18.6
%
B. 21.28
%
C. 24.83
%
D. None of the given answers
Difficulty: Medium
Est time: <1 minute
9. A supplier who changes its trade credit from 3/10 n/30 to 4/15 n/40 is
likely to find:
A. its accounts receivable decrease.
B. its risk of bad debts

reduces.
C. its accounts receivable

increase.
D. a decrease in sales.
Difficulty: Medium
Est time: <1 minute
10. When a business wants to smooth out the timing of its monthly mismatch
between cash inflows and outflows and day-to-day working capital
requirements, it usually:
A. issues bank bills.
B. arranges a bank overdraft

facility.
C. issues a
debenture.
D. issues commercial
paper.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 9.3 Explain the purpose and operation of a bank overdraft facility.
Section: 9.2 Bank overdrafts
11. When a company has a deal with a bank lender that allows access to
short-term funds, this is called:
A. a debt
facility.
B. a credit
facility.
C. a debt
provision.
D. a liability
provision.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. Which of the following statements about an overdraft facility is NOT

correct?
A Banks require an overdraft facility to be operated on a

. fully fluctuating basis.
B Generally, the agreed interest rate on an

. overdraft is calculated by the bank on the
balance at the end of the month.
C The bank lender will charge an
. establishment fee to cover the
establishment costs of an overdraft.
D There is an unused limit fee

. that is much less than the
actual overdraft interest rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The ________ is the benchmark rate of interest charged on loans to a

business borrower by a bank.
A. prime
rate
B. commercial paper
rate
C. Treasury
rate
D. overdraft rate
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. The benchmark or prime rate of interest for overdrafts varies directly
with:
A. demand for funds in the bond markets.
B varying demand and supply for funds in the

. short-term markets.
C varying demand and supply for funds

. in the long-term markets.
D. changing asset prices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. The basic feature of a/an ________ required by some banks is that it
effectively raises the interest cost to the borrower for an overdraft facility.
A. operating change restriction
B. compensating balance
C. commitment
fee
D. annual
cleanup
Difficulty: Hard
Est time: <1 minute
16. If a company has a good credit standing with a bank, it will be charged
______ interest rate margin than/as a company without an established
record.
A. a higher
B. a lower
C. a much higher
D. the
same
Difficulty: Easy
Est time: <1 minute
17. Which of the following statements about bank bills is NOT correct?
A The interest rate on a bank bill is generally higher than

. on a bank overdraft.
B The interest rate on a bank bill is generally

. lower than the yield on a Treasury note.
C The interest rate on a bank overdraft is

. generally higher than the yield on a
Treasury note.
D The interest rate on a bank
. overdraft is generally higher
than the yield on a Treasury
bond.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 9.4 Describe the structure of a commercial bill, including the parties to the bill, the flow of funds, the
establishment and the advantages of issuing bank-accepted bills.
Section: 9.3 Commercial bills
18. If a company wishes to finance a printing press with a two-year life, it

would be advisable to finance it:
A. with an
overdraft.
B. by issuing a bank bill.

C. with the issue of commercial
paper.
D. through its bill rollover

facility.
Difficulty: Medium
Est time: <1 minute
19. A company is likely to issue a bank bill if it wants:
A. long-term financing.
B. to spread its interest payments over the

medium term.
C. short-term
financing.
D. to invest medium-term
funds.
Difficulty: Easy
Est time: <1 minute
20. Which of the following rates serves as a reference interest rate in the
United Kingdom?
A. BBS
W
B. LIBOR
C. USC
P
D. SIBO
R
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. What is a bill of exchange either accepted or endorsed by a bank called?
A. A commercial
bill
B. A bank
bill
C. A trade
bill
D. A negotiable
bill
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. Which of the following statements about the issuing of a commercial bill
is incorrect?
A. Commercial bills are sold at discount to face

value.
B. A bank may accept a commercial

bill.
C The drawer is the party that issues the

. commercial bill.
D The discounter is the party
. that borrows the funds.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
23. The _______ is the party that lends the funds in a commercial bill
transaction.
A. accepto
r
B. discounter
C. drawe
r
D. endorse
r
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
24. Which of the following statements about bank bills is incorrect?
A. The drawer is the party that issues the

bill.
B The acceptor is the party that has primary

. liability to repay the face value of the bill.
C The payee is the party that receives the

. borrowed funds when the bill is
initially issued.
D The discounter is the party
. that repays the acceptor at
maturity.
Difficulty: Medium
Est time: <1 minute
25. The process of discounting a commercial bill means:
A. a buyer for the bill will provide the financing.
B. a seller for the bill will provide the

financing.
C the borrower has a specified time in

. which to repay the loan.
D the acceptor agrees to pay the
. face value of the bill to the
holder at maturity.
Difficulty: Medium
Est time: <1 minute
26. For a commercial bill, the interest rate is quoted as a/an:
A. annual percentage rate.
B. rate based on its

maturity.
C. effective rate.
D. holding period yield.

Difficulty: Medium
Est time: <1 minute
27. Which of the following about bank bills is incorrect?
A For a bank bill, the drawer has the secondary liability to

. pay the holder of the bill at maturity.
B A commercial bank generally carries out the

. role of an acceptor on a bill.
C With a bank as an acceptor, it makes it

. easier to sell the bill at a higher yield.
D When the discounter discounts

. the face value of the bill they
provide the funds to the
borrower.
Difficulty: Medium
Est time: <1 minute
28. In relation to a commercial bill, the acceptance fee is the:
A discounter's fee for taking on the risks associated with

. discounting the bill.
B. fee for drawing up the bill.
C fee for taking the liability for paying

. the holder at maturity.
D drawer's fee for taking on the

. risks associated with drawing
the bill.
Difficulty: Medium
Est time: <1 minute

29. Which of the following statements about bills is incorrect?
A. There is an active secondary market in bank-accepted

bills.
B Once a bill has been discounted into the

. marketplace, the cost of funds will vary for the
issuer.
C The drawer has a liability with a bank-

. accepted bill to pay face value to the
acceptor bank.
D At maturity for a bank-

. accepted bill, the acceptor will
pay face value to the holder.
Difficulty: Medium
Est time: <1 minute

30. When a party endorses a bank bill, it:
A. repays the face value of the bill to the holder at

maturity.
B. creates a liability for payment of the

bill.
C. provides the funds to the

seller.
D provides the funds to the

. discounter of the bill.
Difficulty: Easy
Est time: <1 minute

31. Which of the following statements regarding a bank bill is correct?
A A bank bill is not usually endorsed after it is sold for the

. second time in the secondary market.
B Once a bank becomes an acceptor for a bill

. other financial institutions can buy and accept
the same bank bill.
C A bank bill may be both bank-

. accepted and bank-endorsed.
D A bank-accepted bill tends to

. trade at slightly higher yields
than bank-endorsed bills.
Difficulty: Medium
Est time: <1 minute

32. In relation to a bank bill, endorsement means:
A that the acceptor and endorser make an agreement as to

. who is liable for the repayment of the face value to the
final holder of the bill.
B if the acceptor cannot repay the face value to

. the holder at maturity, it must draw a bill to
meet its obligations.
C the endorser has a contingent liability

. when the bill matures.
D the drawer agrees to pay an

. additional fee to the acceptor
for guaranteeing the
repayment.
Difficulty: Medium
Est time: <1 minute

33. Upon maturity, the final holder of the bill approaches the _________ for
payment.
A. drawe
r
B. accepto
r
C. endorse
r
D. discounter
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

34. Which maturity date is NOT likely for a bank bill?
A. 30
days
B. 90
days
C. 180
days
D. 360
days
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

35. With a bank-accepted bill rollover facility the:
A borrower agrees to accept bills drawn by the bank up to a

. specified limit.
B borrower agrees to accept bills drawn by the

. bank up to an unspecified limit.
C bank agrees to accept bills drawn by

. the borrower up to a specified limit.
D The bank agrees to accept,

. discount and rollover bills at a
fixed interest rate up to a year.
Difficulty: Medium
Est time: <1 minute

36. A major advantage of a bill financing facility is that it:
A. lowers the acceptor's fees for a bank

bill.
B. lowers the drawer's cost in drawing up the

bill.
C allows businesses to access financing

. at a lower cost than overdrafts.
D lowers the discounter's fee for

. taking on risks associated with
the bill.
Difficulty: Medium
Est time: <1 minute

37. Which of the following about bank bill financing facility is incorrect?
A A bill rollover facility is an arrangement whereby the

. bank agrees to accept and discount new commercial bills
for an issuer at each maturity date.
B The yield at which the bill is discounted

. depends partly on the credit rating of the party
that incurs the liability.
C The bank agrees to discount bills up to

. the agreed amounts with a fixed yield
over the life of the rollover facility.
D Bills issued via a rollover

. facility incorporate the higher
credit standing of the bank
acceptor.
Difficulty: Medium
Est time: <1 minute

38. With regard to a rollover bill financing facility:
A the bank agrees to sell commercial bills drawn by the

. borrower for unspecified amounts.
B the bank agrees to sell commercial bills drawn

. by the borrower up to a specified limit.
C the discounter agrees to sell

. commercial bills drawn by the
borrower up to a specified limit.
D none of the given answers

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

39. Compared to other forms of business finance such as term loans, bill
financing offers:
A the advantages of lower costs for the bank not having to

. fund the bill on its balance sheet.
B. disadvantages for the bank due to the issue

fees involved.
C. higher costs due to the lack of

collateral.
D. lower flexibility for the

bank.
Difficulty: Medium
Est time: <1 minute

40. Which of the following statements is correct?
A. A bank bill is a negotiable

instrument.
B A bank-accepted bill is regarded by market

. participants as equivalent to a bank-endorsed
bill.
C The issuer of the bank-accepted bill

. will repay the holder of the bill
directly at maturity.
D The issuer of a bank-endorsed

. bill has to pay regular interest
payments to the holder, unlike
with a bank-accepted bill.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

41. A company issues a 90-day bill with a face value of $100 000, yielding
7.65% per annum. What amount would the company raise on the issue?
A. $84 130.46
B. $92 350.21
C. $98 123.39
D. $98 148.62
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
Learning Objective: 9.5 Complete a range of calculations relevant to discount securities, including the price where the
yield is known, face value where the issue price and yield are known, yield, price where the discount rate is known and
the discount rate.
Section: 9.4 Calculations: discount securities

42. A holder of a 180-day bill with 60 days left to maturity and a face value
of $100 000 chooses to sell it into the market. If 60-day bills are currently
yielding 6.8% per annum, what price will be obtained?
A. $81 728.61
B. $89 945.79
C. $97 813.27
D. $98 894.55
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
the discount rate.

43. A company has decided to issue a 120-day bank-accepted bill to raise
additional funding of $250 000 to buy equipment. If the bank has agreed
to discount the bill at a yield of 7.65% per annum, what will be the face
value of the bill?
A. $230 875
B. $250 000
C. $256 287.67
D. $312 876.71
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
the discount rate.

44. A company wants to invest some surplus short-term funds and plans to
buy a 180-day bank bill with a face value of $100 000. What is the yield
on the bill if its price is currently $94 234?
A. 11.69
%
B. 12.41
%
C. 13.23
%
D. 13.32
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
the discount rate.

45. What is the discount rate of a 120-day bank bill with a face value of $100
000 and currently selling for $95 234, with a full 120 days to run?
A. 13.93
%
B. 14.50
%
C. 15.22
%
D. 16.58
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
the discount rate.

46. A bill of exchange differs from a promissory note in that:
A. only promissory notes have an active secondary market.
B a promissory note is a short-term instrument,

. whereas a bill of exchange is not necessarily
short-term.
C there is generally an issuer and an

. acceptor for a bill of exchange,
whereas there is no acceptor involved
for a promissory note.
D bills of exchange are only

. used for trade transactions.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
the discount rate.

47. Promissory notes have a decided advantage over bills in that:
A. they are
liquid.
B an issuer of a promissory note does not incur a

. contingent liability.
C a borrower without a strong name in

. the markets does not need bank
endorsement.
D sole liability to repay the face

. value at maturity belongs to
the underwriting bank(s).
Difficulty: Easy
Est time: <1 minute
Learning Objective: 9.6 Describe the structure, advantages, establishment, underwriting and calculation of promissory
notes (commercial paper).
Section: 9.5 Promissory notes

48. ________ is a short-term, unsecured discount note issued by corporate
borrowers of high credit standing. The major banks generally issue these
notes on their behalf.
A. A line of
credit
B. Commercial paper
C. A revolving line of
credit
D. A fully drawn
advance
Difficulty: Easy
Est time: <1 minute

49. Which of the following statements about promissory notes is incorrect?
A. Promissory notes are discount securities.
B P-notes are issued by corporations in all the

. major international financial markets.
C. P-notes have no acceptor, only an

endorser.
D P-notes are usually issued as

. unsecured instruments.
Difficulty: Medium
Est time: <1 minute

50. Which financial security is known as one-name paper?
A. Bank
bills
B. CD
s
C. Promissory notes
D. Unsecured
notes
Difficulty: Medium
Est time: <1 minute

51. Commercial paper is usually issued in multiples of:
A. $1000 or
more
B. $10 000 or
more
C. $100 000 or
more
D. $1 000 000 or
more
Difficulty: Hard
Est time: <1 minute

52. Commercial paper is generally sold at a discount from:
A. the prime rate.
B. its face
value.
C. its cost.
D. Treasury
notes.
Difficulty: Easy
Est time: <1 minute

53. Which one of the following statements is true?
A Promissory notes are sold with contingent liability in the

. secondary market.
B Both commercial bills and promissory notes

. are sold with contingent liability in the
secondary market.
C Commercial bills are sold with

. contingent liability in the secondary
market, whereas promissory notes are
sold without contingent liability.
D Promissory notes and

. commercial bills are both sold
without contingent liability in
the secondary market.
Difficulty: Easy
Est time: <1 minute

54. Which one of the following statements is true?
A As a promissory note is a one-name paper, only the buyer

. is required to endorse it.
B If a bank agrees to accept it, a corporation can

. issue a promissory note.
C Usually, initial buyers of promissory

. notes hold them until maturity.
D Typically, a promissory note

. will be issued for 90 days.
Difficulty: Medium
Est time: <1 minute

55. Which of the following statements is NOT a feature of promissory notes?
A. They are issued at discount to face value.
B A typical P-note facility issue program is a

. revolving facility.
C A company may pay an additional fee

. to the underwriter for endorsing the
issue as well.
D Only the largest and most

. creditworthy corporations
issue P-notes.
Difficulty: Medium
Est time: <1 minute

56. Compared with bill financing, commercial paper financing offers a large
creditworthy company:
A. higher costs because of the need for collateral.
B. higher costs owing to the acceptance fee

involved.
C lower costs owing to no contingent

. liability when sold on.
D lower costs owing to lower

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

57. When compared with bank bills, commercial paper has the advantage:
A. that no interest is paid until maturity, unlike for a bank

bill.
B that a holder of commercial paper has no

. contingent liability when selling in the money
markets.
C that an issue of commercial paper

. often has a rollover facility attached,
unlike for bank bills.
D of greater liquidity in the

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

58. The term 'discount security' in relation to a bank bill means:
A when the bank bill is issued, it is less than the principal

. amount to be repaid at maturity.
B the interest on a bank bill is less than other

. money market securities.
C when the principal is repaid to the

. lender, they receive less than other
money market securities.
D the bank bill only pays interest

. annually, unlike other
securities that pay semi-
annually.
Difficulty: Easy
Est time: <1 minute

59. When issuing commercial paper, it is important for a company to have:
A. a party to act as an acceptor and guarantee

payment.
B. collateral to attach to the

issue.
C. a well-established reputation in the

markets.
D investors organised by the

. investment bankers to sell the
issue.
Difficulty: Easy
Est time: <1 minute

60. When underwriting a commercial paper issue, an investment bank's fee
will usually be:
A. 10% per
annum.
B. 1% per
annum.
C. 0.1% per
annum.
D. 0.01% per
annum.
Difficulty: Medium
Est time: <1 minute

61. A commercial paper issue where dealers bid competitively for the paper
is a/an:
A. tap issuance.
B. tender
.
C. offer
.
D. proposition.
Difficulty: Medium
Est time: <1 minute

62. Which of the following about a P-note issue program is incorrect?
A A P-note issue program is a rollover facility whereby as

. P-notes mature, new notes are issued and discounted.
B. A P-note program generally will have a lead

manager.
C When members of the dealer panel bid

. for the paper, bids are generally
quoted to a margin over a specified
benchmark.
D The typical P-note issue

. program is a revolving facility
with the dealer having the right
to cancel, subject to providing
the issuer with the required
notice.
Difficulty: Medium
Est time: <1 minute

63. Where a company wants to guarantee all of its issue of commercial paper,
it can arrange for it to be:
A. sold by
tender.
B. underwritten.
C. sold by
tap.
D sold with a face value less

. than $10 000.
Difficulty: Easy
Est time: <1 minute

64. The most important function of an underwriter for a promissory note
issue is to:
A. provide funding for the corporation.
B. approve the prospectus before distribution to

the public.
C. dilute the corporation's

equity.
D buy the issue of securities from

. the corporation and resell it to
investors.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

65. One of the advantages to the corporation of an underwriting syndicate for
the issue of promissory notes is:
A. they approve the prospectus before distribution to the

public.
B the syndicate submits a combined bid for

. purchase that the corporation compares with
other bids.
C the syndicate monitors and coordinates

. the actions of the different
underwriters.
D the underwriting commitment

. gives the corporation access to
a line of credit extending
beyond the life of the
promissory note.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

66. A company has directly placed an issue of commercial paper that has a
maturity of 90 days, with a face value of $100 000 yielding 8.25% per
annum. What amount would the company raise on the issue?
A. $83 096.19
B. $91 750.00
C. $97 965.75
D. $98 006.31
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

67. As an alternative to issuing a commercial bill for short-term financing,
corporations with an excellent credit standing may:
A. buy commercial
paper.
B. issue commercial
paper.
C. issue preference
shares.
D. issue convertible notes.
Difficulty: Easy
Est time: <1 minute

68. A revolving facility for a promissory note issue usually:
A. has a lead manager to organise the

issuance.
B. offers corporations funding for 180

days.
C gives the issuer the right to cancel the

. program, subject to 90 days' notice.
D. has only an
underwriter.
Difficulty: Medium
Est time: <1 minute

69. A P-note issuer to guarantee all the funds may arrange for:
A. an
underwriter.
B. a supporting guarantee.
C. collateral for the issue.
D. all of the given

choices.
Difficulty: Medium
Est time: <1 minute

70. The role of a lead manager for a promissory note issuance program is to:
A. provide the funds to the

issuer.
B. act as an arranger of the debt issue.
C act as an underwriting syndicate and

. purchase paper not taken up by the
market.
D provide a supporting
. guarantee for the issue.
Difficulty: Medium
Est time: <1 minute

71. The interest rate charged on an unsecured short-term P-note to a company
is generally ________ the interest rate on a secured loan.
A. lower than
B. the same as
C. higher
than
D. unrelated to
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

72. When an issuer of commercial paper issue fails to raise the funds, this
most likely means the:
A. company is in
default.
B. issue is
underpriced.
C. underwriter must purchase unsold

notes.
D issuer must establish a rollover

. facility for the remaining
notes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

73. Which of the following about P-notes is incorrect?
A Commercial paper issued in the euromarkets uses a 360-

. day convention.
B The credit rating of a P-note issuer needs to be

. investment grade.
C A dealer panel is chosen on their

. ability to distribute the paper to the
market.
D If the lead manager has

. arranged a tender panel, then
the members of the panel do
not have any obligation to buy.
Difficulty: Medium
Est time: <1 minute

74. As part of their liability management, banks sell which financial
instrument?
A. Bank
bill
B. Commercial paper
C. Certificate of
deposit
D. Promissory
note
Difficulty: Medium
Est time: <1 minute

75. When a bank needs funds for day-to-day operational liquidity
requirements it may issue:
A. bank bills.
B. CDs
.
C. CP
.
D. P-notes.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

76. As an alternative to issuing a commercial bill for short-term funds, a
corporation may:
A. buy a promissory note.
B. issue a convertible note.
C use the overdraft facility of

. investment bank.
D issue a negotiable certificate

. of deposit.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

77. The major banks lend unsecured short-term funds in the following basic
ways:
A. overdraft, bill financing and commercial

paper.
B. overdraft and bill financing.
C. overdraft and commercial

paper.
D commercial paper, negotiable

. certificates of deposit and
overdraft.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 9.7 Explain the structure, issue and calculation of negotiable certificates of deposit.
Section: 9.6 Negotiable certificates of deposit

78. Negotiable certificates of deposit:
A. pay interest, as they are interest-bearing accounts at a

bank.
B are short-term securities, issued by banks for

. financing purposes.
C have a longer maturity date than

. promissory notes.
D have little liquidity in the

. secondary market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

79. A negotiable certificate of deposit:
A. is a term deposit because it has a specified maturity

date.
B can be issued by banks to meet their

. operational liquidity.
C. is a short-term discount
security.
D. is all of the given answers.
Difficulty: Medium
Est time: <1 minute

80. If a company wished to invest funds in the short term, it could:
A. issue a commercial bill.
B. issue a promissory note.
C. buy a negotiable certificate of

deposit.
D. buy a promissory note.
Difficulty: Medium
Est time: <1 minute
81. A source of short-term funds available to smaller firms (for example,

finance provided to a car dealership for car funding) is:
A. floor plan finance.

B. factoring.
C. with-recourse factoring.
D. accounts receivable
financing.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 9.8 Discuss the nature and operation of inventory finance, accounts receivable financing and
factoring.
Section: 9.7 Inventory finance, accounts receivable financing and factoring
82. Most agreements involving factoring of accounts receivable are made on

a _______ basis.
A. non-recourse
B. notification
C. recours
e
D. non-
notification
Difficulty: Hard
Est time: <1 minute
factoring.
83. Which of the following is NOT an advantage of factoring?
A. Known cash flows are generated
B. Accounts receivable is turned into cash

without delay
C The credit and collection department

. of a company may be eliminated
D The cost of financing is
. relatively high
Difficulty: Medium
Est time: <1 minute
factoring.
84. Which one of the following statements regarding factoring is correct?
A. Some banks and bank subsidiaries may provide

factoring.
B Under with-recourse factoring, when a

. customer makes a payment the factoring
company passes the money on to the company
minus a handling fee.
C The discount charged by the factoring

. company is approximately equal to the
rate charged on a secured overdraft
loan.
D With non-recourse factoring,

. the company cannot sell
additional accounts receivable
to the factoring company after
the initial amount.
Difficulty: Hard
Est time: <1 minute
factoring.
85. Under a non-recourse arrangement the factoring company has:
A. a claim against the

vendor.
B. no claim against the seller of the accounts.
C. a claim against the seller's

bank.
D a claim against the vendor's
. other assets.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
factoring.
86. When the factoring company can make a claim against the firm that sold
them the accounts this is called _____ arrangement
A. a non-recourse
factoring
B. a recourse
factoring
C. a notification factoring
D. a non-notification factoring
Difficulty: Medium
Est time: <1 minute
factoring.
87. When a finance company provides a loan to a business against the

security of the business's accounts receivable this is called:
A. factoring.
B. floor plan finance.
C. trade
credit.
financing.
Difficulty: Medium
Est time: <1 minute
factoring.
88. When a financier provides a business with finance by buying its

business's accounts receivable this is called:
A. factoring.
B. floor plan finance.
C. trade
credit.
financing.
Difficulty: Medium
Est time: <1 minute
factoring.
89. A bank that provides an overdraft facility to business customers expects

the overdraft to have a fluctuating balance and doesn't require the
customer to have the account in credit at any stage.
FALSE
A borrower is expected to reduce or bring the overdraft into credit as and

when future cash flows are received by the company.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
90. One of the advantages of an overdraft facility, from the viewpoint of a

borrower, is it can be used to smooth out any seasonal mismatch between
its cash inflows and outflows.
TRUE
Once the overdraft limit has been established a company may draw down
the funds at any time without notice.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

91. Commercial bills are a category of bills of exchange that are issued by
commercial banks.
FALSE
Commercial bills are discount securities used by corporations to borrow

short-term funds in the money markets.
Difficulty: Easy
Est time: <1 minute
92. The return on a commercial bill for a holder at its maturity is the
difference between its discounted purchase price and the face value of the
bill.
TRUE
A commercial bill is a discount instrument where the return to the holder

of the bill is the difference between the discounted price and the face
value at maturity.
Difficulty: Easy
Est time: <1 minute
93. With a bank-accepted bill the drawer has a secondary liability after the
acceptor to pay the holder of the bill the face value of the bill at the
maturity date.
TRUE
If the bill is dishonoured by the acceptor at maturity, the drawer has the
responsibility to pay the bill holder.
Difficulty: Medium
Est time: <1 minute

94. The initial discounter of a commercial bill is the issuer of the bill who
receives the funds.
FALSE
The discounter is the entity that provides the funds to the issuer of the
bill, the drawer.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
95. The acceptor of a commercial bill undertakes to pay the face value of the
bill to the holder at maturity.
TRUE
The acceptor of the bill, that is a bank, pays the holder. Generally a bank
has a separate arrangement with the drawer, the original borrower, for
them to repay the bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. The market for bank-accepted bills is an illiquid one as banks tend to hold
them until maturity.
FALSE
The bank-accepted bill market is a very liquid part of the money markets.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

97. A major advantage of bill financing over other forms of short-term debt
such as overdrafts is that the cost is usually lower.
TRUE
A fundamental reason for the lower cost is that a bank does not have to
fund the bill on its balance sheet but can sell the bill into the money
markets.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
98. Commercial paper securities are unsecured promissory notes, issued by

corporations, which generally mature within 180 days.
TRUE
Commercial papers are discount securities issued without an acceptor by

large corporations with a high credit rating.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
99. In establishing an overdraft facility with a company, what are some of the
firm-related factors a bank will consider?
A bank will consider a company's past financial performance and future

cash flows, the length of the typical mismatch between a company's cash
inflows and outflows and the adequacy of the collateral available in the
case of default by the borrower.
Bloom's: Knowledge

100. Discuss what factors influence the yield at which a commercial bill will
be discounted
The yield will be affected by factors that determine the general level of
interest rates in the economy, and then by the credit rating of the parties
involved. A bank-accepted bill will include the higher credit standing of
the acceptor and so be able to be discounted at a lower yield than a bill
issued by a drawer of lower credit standing.
Bloom's: Knowledge
101. What are some of the advantages of bill financing for a company over
other forms of short-term debt?
First, a major advantage is usually it is of lower cost. Second, it provides

a known cost of financing for the borrower. It also offers considerable
flexibility for the borrower; once they have drawn up a bill facility, they
can progressively issue bills over time.
102. What are some advantages of promissory notes financing for a large
company?
For a large company it can mean a lower cost of funding than using a
bank bill facility as the company does not incur bank bill fees, and the
owner of a P-note can sell it without incurring a future contingent
liability.
the discount rate.

103. Negotiable certificates of deposit are short-term securities issued by
banks. Discuss their uses.
Banks can issue short-term negotiable certificates of deposit (CDs) to

institutional investors so the banks can manage their liabilities and
liquidity. As part of their liability management banks issue CDs to raise
extra funds to meet loan and funding commitments; for example, when
they expect customers to spend more money in the holiday season.
Chapter 10
1. In relation to long-term financing, a fully drawn advance is a:
A a bank loan advanced for a precise period for an

. unspecified purpose.
B A term loan where the full amount is provided

. at the start of the loan, usually for a specified
purpose.
C A term loan where the borrower has

. the option of putting its operating
account in deficit up to an agreed
limit.
D A term loan where the bank

. does not pay out the loan until
after a specified period.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.1 Explain term loans and fully drawn advances, including their structure, loan covenants and the
calculation of a loan instalment.
Section: 10.1 Term loans or fully drawn advances
2. If a company wishes to finance a printing press with a five-year life, it

would be advisable to finance it with a/an:
A. overdraft.
B. bank
bill.
C. commercial
paper.
D. fully drawn advance.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

3. If a company wished to structure its financing so it repaid funds borrowed

only when a project begins to have positive cash flows, it would choose
a/an:
A. fully drawn advance.
B. term loan.
C. interest-only
loan.
D. deferred payment loan.
Difficulty: Medium
Est time: <1 minute

4. Long-term debt can be categorised as financing with an initial maturity:
A. over 180 days and less than a

year.
B. between 1 and 3
years.
C. over 1
year.
D. between 3 and 12
years.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

5. In relation to long-term financing, an amortised loan involves:
A. periodic payments principal and interest repaid at

maturity.
B periodic interest and principal repayments

. when positive cash flows begin.
C periodic interest payments and

. principal repaid at maturity.
D periodic equal repayments of

. interest and principal
throughout the term.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

6. Which of the following statements best describes a fully amortised term
loan?
A A fully amortised term loan is an interest-only loan with

. principal repayable at maturity.
B A fully amortised term loan has periodic

. repayments, including interest and principal
reduction.
C Interest repayments on a fully

. amortised term loan are fixed for the
period of the loan.
D A fully amortised term loan is

. a ‘low-start' loan whose
repayments are increased over
the term.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

7. Term loans where each periodic loan payment consists of interest
payments and then the principal is repaid in full at maturity are:
A. fully drawn advances.
B. amortised loans.
C. interest-only loans.
D. credit foncier loans.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
8. The fees that represent bank costs in considering loan applications and
document preparation are called:
A. commitment fees.
B. establishment fees.
C. line fees.
D. service
fees.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9. The fees charged by banks onto the total amount of the loan facility and
are normally payable in advance are:
A. commitment fees.
B. establishment fees.
C. line fees.
D. service
fees.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. Compared with an amortised loan, a deferred repayment loan involves:
A. periodic interest and principal

repayments.
B periodic interest and principal repayments

. when positive cash flows begin.
C periodic interest payments and

. principal repaid at maturity.
D periodic principal payments
. and interest repaid at maturity.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
11. The main longer-term finance provided by financial intermediaries is/are:
A. certificates of deposit.
B. commercial
paper.
C. corporate bonds.
D. term
loans.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. ________ granted by banks generally have maturities of three to 15 years

and are often made to finance capital expenditure such as building
construction and the purchase of real estate.
A. Debentures
B. Mortgage
bonds
C. Term
loans
D. Capital
leases
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. A term loan is:
A. a bill issued to finance a specific trade transaction.
B. a bill issued to raise funds for general

purposes.
C a flexible funding arrangement for

. companies.
D when funds are borrowed for
. a set period.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. Banks usually charge a/an _______ for any portion of a term loan that has
not been drawn down.
A. establishment fee
B. service fee
C. commitment
fee
D. term fee
Difficulty: Medium
Est time: <1 minute
15. A bank charge on any part of a loan that has not been fully drawn down
by a company is called a/an:
A. establishment fee.
B. commitment
fee.
C. line fee.
D. service fee.
Difficulty: Easy
Est time: <1 minute
16. All of the following affect interest rates charged on term loans except:
A. default
risk.
B. the
maturity.
C. the repayment
schedule.
D. refinancing risk.
Difficulty: Easy
Est time: <1 minute
17. Which of the following rates serves as a reference interest rate in

Australia?
A. BBS
W
B. LIBOR
C. USC
P
D. SIBO
R
Difficulty: Easy
Est time: <1 minute
18. If the interest rates on shorter term-to-maturity deposits are higher than
those of longer term deposits, it is likely that the costs for the longer term
financing for a company are:
A. higher
.
B. lower
.
C. the
same.
D. not related.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
19. One of the advantages of a prime rate set by a financial institution is that
it is less likely to be affected by:
A. changes in the bank bill swap rate.
B. short-term market
illiquidity.
C. short-term credit fluctuations.

Difficulty: Medium
Est time: <1 minute
20. A company can borrow from a bank at a margin to the bank's base rate.
According to the text, all of the following factors affect this margin
except:
A. the credit risk of the

company.
B. the term of the

loan.
C. the term structure of interest
rates.
D. the loan repayment

schedule.
Difficulty: Medium
Est time: <1 minute
21. When a lender includes conditions in a loan agreement to protect its loan,
these are known as:
A. loan
agreements.
B. loan covenants.
C. loan
terms.
D. loan actions.
Difficulty: Medium
Est time: <1 minute
22. When a loan agreement contains actions for a borrowing company to

comply with, such as supplying financial statements, these are called:
A. accounting ratios.
B. negative
covenants.
C. positive covenants.
D. loan options.
Difficulty: Medium
Est time: <1 minute
23. Which of the following is NOT usually an example of restrictive debt

covenants?
A. Limitations on additional
borrowing
B. Constraints on disposal of non-current assets
C. Minimum levels of cash

flow
D Supplying the creditors with
. annual, audited financial
statements
Difficulty: Medium
Est time: <1 minute
24. Which of the following is NOT an example of negative debt covenants?
A. Specifying what activities the business can enter

into
B. Restrictions on amalgamation with other

companies
C Supplying creditors with annual

. audited reports
D Limiting annual dividend
. payments to shareholders
Difficulty: Medium
Est time: <1 minute
25. Which of the following is NOT an example of a positive debt covenant?
A. The company has to maintain a minimum level of

working capital.
B The company is restricted from doing mergers

. and acquisitions.
C The company has to supply periodic

. cash flow statements to the lender.
D The company has to supply
. annual audited statements to
the lender.
Difficulty: Medium
Est time: <1 minute
26. The purpose of debt covenants that require the firm to rank any
subsequent borrowing below the original loan is to:
A. limit the amount of fixed-interest payments.
B make sure that any cash restraints do not affect

. current obligations.
C protect the lender in their claim over

. pledged assets in the event of failure.
D protect the shareholders'
. claims over assets.
Difficulty: Medium
Est time: <1 minute
27. The purpose of debt covenants that ban borrowers from entering into
certain types of leases is to:
A. limit the amount of fixed-interest payments.
B prevent the firm from supplying too many cars

. to employees.
C protect the lender in their claim over

. pledged assets in the event of failure.
D protect the shareholders'
. claims over assets.
Difficulty: Medium
Est time: <1 minute
28. A breach of any specified loan covenant by the borrower generally gives
the lender the right to do all of the following, except:
A. increase the interest

rate.
B. demand immediate repayment of the

loan.
C alter the term of the agreement, such

. as by reducing the maturity date.
D insist the company hand over
. its assets.
Difficulty: Medium
Est time: <1 minute
29. A key difference between a positive covenant and a negative covenant is,
for a:
A positive covenant, a company must comply with

. restrictions on its financial structure.
B negative covenant, a company must maintain a

. minimum level of working capital.
C negative covenant, a company must
. provide annual audited financial
statements.
D positive covenant, a company

. must maintain a minimum debt
to gross cash flow ratio.
Difficulty: Hard
Est time: <1 minute
30. Which of the following is a positive loan covenant?
A. A minimum working capital

ratio
B. A maximum gearing
ratio
C. A maximum level of unsecured

debt
D. All of the given
answers
Difficulty: Medium
Est time: <1 minute
31. A ________ is provided to a business by a financial institution and has a

maturity of more than one year.
A. debentur
e
B. mortgage
bond
C. term loan
D. zero-coupon bond
Difficulty: Easy
Est time: <1 minute
32. The type of loan where a company pays periodic interest payments over
its term and the principal at maturity to a lender is called:
A. amortised
.
B. a debit
foncier.
C. deferred
payment.
D. interest-
only.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
33. All of the following financial institutions arrange mortgage finance for
companies except:
B. insurance companies.
C. building
societies.
D. investment banks.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.2 Describe the nature, purpose and operation of mortgage finance and the mortgage market, and
calculate an instalment on a mortgage loan.
Section: 10.2 Mortgage finance
34. The lender who registers a mortgage as a security for a loan is the:
A. mortgagor
.
B. mortgagee.
C. mortgager
.
D. mortgage
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
35. The borrower who issues a mortgage with real property as collateral to
the bank is the:
A. mortgagor
.
B. mortgagee.
C. mortgager
.
D. mortgage
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
36. A company borrows $75 000 from a bank, to be amortised over five years
at 8.5% per annum. The annual instalment is:
A. $12 657.43
B. $16 275.00
C. $19 032.43
D. none of the given
answers
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
37. A company borrows $125 000 from a bank at 7.2% per annum to be
amortised over six years. The monthly instalment is:
A. $1861.1
1
B. $2143.15
C. $7274.21
D. $26 386.61
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
38. In Australia which of the following long-term debt markets are the
largest?
A. The corporate bond market
B. The mortgage market
C. The unsecured note market
D. The leasing market

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
39. When illiquid assets are transformed into new asset-backed securities, the
process is called:
A. conversion
.
B. liquidisation.
C. securitisation
.
D. transformation
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. Many years ago, banks:
A. could make mortgage loans to households but not to

businesses.
B could make loans to businesses but not make

. mortgage loans.
C held most loans on their books until

. they were paid off.
D repackaged and sold most

. loans to investors.
Difficulty: Medium
Est time: <1 minute

41. The value of a bond is the present value of the:
A. dividends and coupon payments.
B. dividends and maturity

value.
C. maturity value.
D coupon payments and

. maturity value.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 10.3 Discuss the bond market, in particular the structure and issue of debentures, unsecured notes
and subordinated debt.
Section: 10.3 The bond market: debentures, unsecured notes and subordinated debt
42. The coupon interest of a bond is calculated based on its _______, and is
paid periodically.
A. market
value
B. book value
C. face
value
D. surrender
value
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. Which of the following types of bond generally has the lowest interest
rate?
A. Treasury
bonds
B. Corporate BAA
bonds
C. Semi-government bonds
D. Corporate ABB
bonds
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. Corporations and governments use long-term debt financing called:
A. retained earnings.
B. bonds
.
C. shares.
D. preferred
stock.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. Bonds are:
A. a type of equity
financing.
B a short-term financial arrangement with

. periodic interest payments.
C a debt instrument issued at discount

. with interest and principal repaid at
maturity.
D. long-term debt
instruments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. Compared with unsecured notes, a debenture can offer:
A. a fixed charge over the issuer's already pledged

assets.
B. a floating charge over the issuer's unpledged

assets.
C less chance of sale before maturity, as

. they are not usually traded.
D provisions for interest rate

. changes.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
47. An unsecured note differs from a debenture in that it has:
A. as security only unpledged

assets.
B. as security a floating charge over

assets.
C. as security a fixed charge over

assets.
D. no supporting
security.
Difficulty: Medium
Est time: <1 minute
48. A debt security supported or secured by mortgage assets held by a bank is
a/an:
A. debenture
.
B. income
bond.
C. mortgage
bond.
D. fixed-charge debenture.
Difficulty: Easy
Est time: <1 minute
49. All of the following are examples of long-term debt instruments except:
A. term
loans.
B. debentures
.
C. promissory notes.
D. bonds
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
50. In relation to an issue of bonds, the method where the bond offer is made
only to institutions that deal regularly in securities is called:
A. public issue.
B. family issue.
C. private
placement.
D. institutional
issue.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
51. A debenture is a/an:
A. unsecured bond that only best-name corporate borrowers

can issue.
B legal document stating the restrictive

. covenants on the loan.
C bond secured by a charge over the

. assets of the issuer.
D corporate bond with a credit

. enhancement.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
52. A company issues a long-term debt security with specified interest
payments and fixed charges over unpledged assets. What type of security
has been issued?
A. Subordinated debt
B. Unsecured
notes
C. Commercial mortgage
D. Debenture
Difficulty: Medium
Est time: <1 minute
53. When a company defaults on interest payments for a debenture, the
floating charge is said to ______ a fixed charge.
A. transform
into
B. crystallise into
C. originate
as
D. adjust to
Difficulty: Easy
Est time: <1 minute
54. In the event of failure for a company that has issued a bond, the highest
claims on the company's assets generally comes from:
A. floating-charge debenture holders.
B. fixed-charge debenture
holders.
C. unsecured note holders.
D. the
shareholders.
Difficulty: Easy
Est time: <1 minute
55. A holder of ________ has generally no charge over the issuing company's
unpledged assets.
A. a
debenture
B. a subordinated debenture
C. a floating charge
debenture
D. an unsecured note
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
56. Many securities contain an option that is included as part of a bond or
preferred share, which allows the holder to convert the security into a
predetermined number of shares. This feature is called a:
A. conversion feature.
B. put
option.
C. repurchase agreement.
D. warrant.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
57. Which type of financial claim is not satisfied until those of the creditors
holding certain senior debts have been fully satisfied?
A. Mortgage
bonds
B. Unsecured
notes
C. Subordinated debentures
D. Deferred interest
debentures
Difficulty: Medium
Est time: <1 minute
58. If a bond investor pays $1030 for an annual coupon bond with a face
value of $1000, it follows that:
A. the coupon rate is higher than the current market yield.
B. the current market yield and coupon rate are

equal.
C the current market yield is higher

. than the coupon rate.
D not enough information is

. given to compare the coupon
rate and current market yield.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 10.4 Calculate the price of a fixed-interest bond.
Section: 10.4 Calculations: fixed-interest securities

59. Which one of the following statements about bonds is correct?
A. Most bonds pay interest

annually.
B The yield on a bond for a bond investor is

. generally a fixed rate.
C Bond prices vary inversely with

. interest rates.
D Bond coupon rates vary with

. interest rates.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

60. The _______ value of a bond is also called its par value. Bonds with a
current price greater than their par value sell at _______, while bonds
with a current price less than their par value sell at _______.
A. premium; face value; a

discount
B. discount; a premium; face

value
C. face; a premium; a discount
D. premium; a reduction; a
discount
Difficulty: Medium
Est time: <1 minute

61. What happens to the coupon rate of a $100 face value bond that pays $7
coupon annually, if market interest rates change from 8 to 9%? The
coupon rate:
A. increases to
8%.
B. increases to
9%.
C. remains at 7%.
D. increases to nearly
9%.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

62. The market price of previously issued bonds is often different from face
value because:
A. the coupon rate has

altered.
B. the maturity date has

altered.
C. the market rate of interest has

altered.
D previously issued bonds sell at

. a discount to new bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

63. The price of a bond with a fixed coupon has a/an _______ relationship
with the market interest rates.
A. constan
t
B. linea
r
C. varying
D. invers
e
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

64. When the coupon rate of a bond is above the current market interest rates,
a bond will sell at:
A. discount
.
B. its original value.
C. premium.
D. face
value.
Difficulty: Medium
Est time: <1 minute

65. When the coupon rate of a bond is below the current market interest rates,
a bond will sell at:
A. discount
.
C. premium.
D. face
value.
Difficulty: Medium
Est time: <1 minute

66. When the coupon rate of a bond is equal to the current market interest
rates, a bond will sell at:
A. discount
.
C. premium.
D. book value.
Difficulty: Easy
Est time: <1 minute

67. A company has two outstanding bonds with the same features, apart from
the maturity date. Bond A matures in five years, while bond B matures in
10 years. If the market interest rate changes by 5%:
A. bond A will have the greater change in

price.
B. bond B will have the greater change in

price.
C. the price of the bonds will not

alter.
D the price of the bonds will

. change by the same amount.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

68. A company has two outstanding bonds with the same features, apart from
their coupon. Bond A has a coupon of 5%, while bond B has a coupon of
8%. If the market interest rate changes by 10%:
A. bond A will have the greater change in

price.
B. bond B will have the greater change in

price.
C. the price of the bonds will not

alter.
D the price of the bonds will

. change by the same amount.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

A Short-term debt instruments are more volatile in price

. than long-term instruments.
B Coupon rates are generally fixed when the

. bond is issued.
C Bond prices and market interest rates

. move together.
D The higher the coupon of a

. bond, the lower its price.
Difficulty: Medium
Est time: <1 minute

70. A $1000 face value bond, with coupon rate of 8% paid annually, has five
years to maturity. If bonds of similar risk are currently earning 6%, what
is the current price of the bond?
A. $920.15
B. $1000
C. $1084.25
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

71. A $1000 face value bond, with coupon rate of 9% paid annually, has six
years to maturity. If bonds of similar risk are currently earning 11%, what
A. $915.39
B. $1000
C. $1089.72
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
72. All of the following features of a bond are fixed except the:
A. coupon
rate.
B. face
value.
C. price.
D. interest
payments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. A $1000 face value bond, with a 7.5% coupon rate paid semi-annually
and maturing in five years, is currently yielding 6.4% in the market. What
A. $1000
B. $1045.84
C. $1046.44
D. $1079.45
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
74. When the market interest rates decline after a bond is issued, the:
A. face value of the bond

decreases.
B. market value of the bond increases.
C. market value of the bond

decreases.
D. bond price is at a discount.
Difficulty: Medium
Est time: <1 minute
75. When market interest rates increase after a bond is issued, the:
A. face value of the bond increases.
B. market value of the bond increases.
C. market value of the bond

decreases.
D. bond price is at a
premium.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. If a bond's price is at a premium to face value, it has a:
A. yield below its coupon rate of interest.
B. yield equal to its coupon rate of interest.
C. yield above its coupon

rate.
D. decreased risk premium.
Difficulty: Medium
Est time: <1 minute

77. If a bond's price is at a discount to face value, it has a:
A. yield below its coupon rate of interest.
B. yield equal to its coupon rate of interest.
C. yield above its coupon

rate.
D. decreased risk premium.
Difficulty: Medium
Est time: <1 minute

78. A bond's price will be _______ when the coupon rate is higher than
current market interest rates; _______ when the coupon rate is equal to
the current market interest rates; and _______ when the coupon rate is
less than the current market interest rates.
A. at a premium; equal to the face value; at a

discount
B. at a premium; at a discount; equal to the face

value
C at a discount; at a premium; equal to

. the face value
D equal to the face value; at a

. discount; at a premium
79. What is the current price of a debenture with a $500 000 face value, a
coupon rate of 9.5% paid semi-annually, six years remaining to maturity
and market interest rates increased to 14%?
A. $320 149.12
B. $401 613.48
C. $410 644.78
D. $688 638.80
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

80. Which of the following statements about ‘net' finance leases is incorrect?
A The lessor will be responsible for the periodic

. maintenance of the asset.
B At the end of the lease period, the company

. will be required to make a residual payment.
C Upon payment of the residual amount,

. ownership of the asset transfers to the
company.
D The lessor's role is one of

. financing, while the lessee
makes regular rental payments.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 10.5 Explain lease financing, including types of lease arrangements and lease structures.
Section: 10.5 Leasing

81. A/An _______ lease is a short-term arrangement where the lessee agrees
to make periodic payments to the lessor for the right to use the asset. This
arrangement usually contains only minor or no penalties for cancellation
of the lease.
A. financial
B. operating
lease
C. direc
t
D. leverage
d
Difficulty: Medium
Est time: <1 minute

82. The type of lease where the costs of ownership and operation are borne
by the lessee, who agrees to make a residual payment at the end of the
lease period, is a/an:
A. direct
lease.
B. financial lease.
C. operating
lease.
D. leveraged
lease.
Difficulty: Medium
Est time: <1 minute

83. When a finance company purchases assets with its own funds and leases
them to a lessee for a negotiated long-term period this is called a/an:
A. direct
lease.
B. sale and lease-

back.
C. operating
lease.
D. leveraged
lease.
Difficulty: Medium
Est time: <1 minute

84. For what type of lease does the lessee borrow a large part of the funds,
typically in a multi-million dollar arrangement, often with a lease
manager, while one or more financial institutions provide the remainder?
A. An equity lease
B. A leveraged
lease
C. A sale and leveraged

lease
D. A financial
lease
Difficulty: Medium
Est time: <1 minute

85. A direct finance lease is best described as a/an:
A. operating
lease.
B. sale and leaseback

arrangement.
C. full-service lease.
D. leveraged
lease.
Difficulty: Medium
Est time: <1 minute

86. Which of the following is NOT an advantage of leasing from the lessee's
viewpoint?
A. 100% financing
B. The company's capital is not

involved
C. Flexible repayment
scheduling
D With a net lease, costs of

. ownership remain with the
lessee
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

87. Which of the following is NOT an advantage of leasing from the lessor's
perspective (compared with offering a straight loan)?
A. Leasing has a relatively low default risk.
B Administration costs may be lower for a lease

. than for a straight loan.
C The return to the lessor may be higher

. than for a straight loan.
D The lessor may use the funds

. for other investment
opportunities.
Difficulty: Medium
Est time: <1 minute

88. For what type of lease does the lessee provide a significant part of the
funds to purchase the asset, often losing the advantage of leveraged
leasing, while a financial institution provides the remainder?
A. A capital
lease
B. An equity lease
C. A sale and leveraged

lease
D. A financial
lease
Difficulty: Medium
Est time: <1 minute

89. A term loan is referred to as a fully drawn advance when the borrower
obtains the full amount at the start of the loan.
TRUE
The full amount of the loan is provided to the borrower at the start of the
loan.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
90. A term loan with interest and principal repayments that are amortised
over the term are sometimes called credit foncier loans.
TRUE
This is a term loan that involves regular equal payments that include an
interest payment part and a principal reduction part.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
91. A long-term loan will generally attract a higher rate of interest than a
short-term loan.
TRUE
Generally a borrower will have to pay higher interest for a longer term
loan than a short-term loan owing to the lenders wanting compensation
for liquidity and interest rate risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

92. Banks often calculate a prime rate lending as they can adjust it more
quickly than other reference money market rates.
FALSE
The prime rate of a bank reflects its borrowing costs but in practice a
prime rate tends to be less volatile than market interest rates.
Difficulty: Medium
Est time: <1 minute
93. Apart from an interest charge on funds advanced to a borrower, a bank

will charge a service fee for considering the loan application and loan
preparation.
FALSE
Apart from an establishment fee, a bank will charge a service fee for
ongoing loan account administration costs, not for considering the loan
application—that is the establishment fee.
Difficulty: Medium
Est time: <1 minute
94. A positive loan covenant can state that a company must maintain a
minimum level of working capital.
TRUE
Loan covenants are rules in the actual loan contract about how much
borrowing a borrower may do and a positive covenant specifies acts to be
taken by the borrower.
Difficulty: Medium
Est time: <1 minute

95. The inclusion of covenants in a term loan is designed to protect the
borrower from taking on too much debt.
FALSE
Covenants in loan contracts are designed to protect the lender's financial

risk exposure by imposing rules on the borrower.
Difficulty: Medium
Est time: <1 minute
96. Under mortgage financing, the mortgagor is the lender of the mortgage
funds.
FALSE
The mortgagor is the borrower who issues a mortgage contract to the

lender of funds with the land and property as collateral.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
97. A bond is a long-term debt instrument issued directly into the capital
markets.
TRUE
It is the long-term financial instrument when a borrower issues a financial

security directly into the debt markets. A bond promises to pay its holder
regular coupon payments and principal is repaid at maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. The terms subordinated debt and unsecured note are interchanged as they
are both corporate bonds that have identical features.
FALSE
Subordinated debt refers to different debt issues with different ranking in

respect to payment claims in the case of default by the company. An
unsecured note is a corporate bond with no security or collateral attached.
Difficulty: Medium
Est time: <1 minute
99. Discuss major features of a term loan.
A term loan is the main type of intermediated finance provided by

financial institutions. It is a loan advanced for a specific period for a
variety of purposes such as purchase of real estate, construction of
premises or for buying plant and equipment. It is generally granted for a
period from between three and 15 years and the lender generally requires
some form of security to be attached to the loan that may be structured as
an amortised loan or an interest-only loan.
100. Define and discuss a reference interest rate in relation to lending.
A loan agreement will generally specify a reference interest rate that will
apply for the loan and any subsequent reset of the loan, such as the
BBSW rate, which is an adjusted average of the bank bill rate in the
Australian money market. Published benchmarks are used as benchmarks
for pricing loans. Banks also calculate their own reference benchmark
called a prime rate.
101. Discuss the features of mortgage agreements for commercial loans.
Companies may obtain debt finance by providing security to the lender

by way of a mortgage over land and in some cases leasehold land.
Commercial mortgage finance tends to be provided on shorter terms to
maturity than retail mortgage loans. In Australia commercial property
mortgages typically range up to 10 years and are available with a choice
of variable interest rate or fixed interest rate.
102. Identify the main debt securities of the Australian bond market.
The main debt securities are bonds issued by the Australian government,
bonds issued by state government borrowing authorities known as semis,
bonds issued by financial institutions such as National Bank of Australia,
bonds issue by Australian corporations, asset-backed securities and
Kangaroo bonds, which are Australian dollar bonds issued by non-
residents.
103. Discuss the use of a prospectus in relation to the issue of debt securities.
In most countries where a corporate bond market exists, legislation will

require any invitation to the public to deposit money with or lend to a
corporation to be accompanied by a prospectus. A prospectus is a formal
written offer to sell securities and will generally contain specified details
about the business such as financial statements, and specialist accounting,
taxation and legal reports. It is intended to protect the investor but does
create certain disadvantages for the borrower such as being time
consuming to prepare.
Chapter 11
1. The largest borrowers in the international markets currently are:
A. wealthy individuals.
B. Japanese households.
C. financial
institutions.
D governme
. nts.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 11.1 Explain the origins and the continued existence of the euromarkets.
2. Borrowers may access the international debt markets if:
A. they have a number of debt issues

already.
B they have a large number of

. shares on issue.
C a large number of
. investors are willing
to buy their shares.
D they have
. good credit
standing.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. The existence of ________ allows large multinational

corporations to use large banks or groups of banks to invest and
raise short-term funds in many countries but not in the currency
of those countries.
A. the World
Bank
B. a strong US dollar
C. eurocurrency
markets
D the
. International
Monetary
Fund
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 11.1 The euromarkets
4. A major reason for the ongoing growth of the euromarkets is:
A that most euromarket securities are bearer

. instruments.
B that interest rates on deposits

. are generally higher than in the
domestic country.
C the high level of
. regulation that
reduces the default
risk.
D that a
. borrower
may
diversify
debt across a
number of
international
markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. Deregulation of the international financial system and the

process of globalisation in the early 1980s encourage:
A. banks to raise funds in the international

markets.
B investors into the international
. markets as they could earn
higher returns.
C borrowers to
. diversify debt across
a number of
international
markets.
D all of the
. given
answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. The majority of financial instruments in the euromarkets are

currently denominated in:
A. euros.
B. Japanese yen.
C. British pounds.
D. US
dollars.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. Which of the following best defines a euromarket-type

transaction?
A A transaction conducted in ‘European

. currency units' within the European Union
B A financial transaction
. denominated in a currency
outside the currency of the
country where the debt issue is
made
C A wholesale foreign
. exchange transaction
of a government or
institutional investor
D A financial
. transaction
in USD,
conducted
solely within
the
European
markets
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

8. Which of the following statements in relation to the relative cost
of transactions in the euromarkets is incorrect?
A Euromarket transactions transcend country

. boundaries and therefore are not exposed to
foreign exchange risk.
B They do not deal in small retail

. market transactions, so their
administrative and operating
costs per dollar transacted are
lower.
C Loans tend to be for

. large amounts to
medium-to-large
borrowers, and so
fewer resources are
devoted to credit
risk assessment per
dollar lent.
D Since
. transactions
are
conducted
outside the
jurisdiction
of central
bank
regulation,
costs
associated
with
regulatory
controls are
minimised.
Difficulty: Medium
Est time: <1 minute
9. When an Australian company borrows in the euromarkets and

the Australian dollar depreciates more than the interest rate
advantage, the actual cost of the loan is:
A lower than if the company had borrowed

. in Australia.
B higher than if the company

. had borrowed in Australia.
C unaffected, as the
. company has a
natural hedge.
D offset by the
. principal
increase.
Difficulty: Medium
Est time: <1 minute
10. When an Australian company borrows through an issue of bonds

denominated in USD into the Japanese markets the company has
conducted a:
A. a euroyen transaction.
B. a eurobond transaction.
C a eurodollar
. transaction.
Da
. eurokangaro
o
transaction.
Difficulty: Medium
Est time: <1 minute
11. An Australian company that issues commercial paper

denominated in Australian dollars into the USA is conducting a:
A. eurocredit
loan.
B. euromarket
transaction.
C. eurodollar
loan.
D eurodollar
. deposit.
Difficulty: Easy
Est time: <1 minute
12. According to the text. the part of the euromarkets providing

intermediated bank financing is the:
A. eurobank
markets.
B. eurocurrency
markets.
C. eurobond
markets.
D euronote
. markets.
Difficulty: Medium
Est time: <1 minute
13. Eurocurrency markets are:
A. domestic European money

markets.
B. domestic European capital

markets.
C international
. markets providing
intermediated bank
finance.
D international
. markets
providing
foreign
exchange
transactions.
Difficulty: Medium
Est time: <1 minute
14. Costs faced by banks in the euromarkets operations tend to be:
A. higher per dollar of business transactions.
B higher due to the large

. amounts of funds involved.
C lower per dollar of

. business
transactions
involved.
D higher due
. to the
operating
costs per
dollar.
Difficulty: Medium
Est time: <1 minute
15. Eurodollars:
A are USD-denominated bank deposits with

. fixed maturity and so are somewhat illiquid.
B offer the borrower a lower

. interest rate than may be
received in the domestic
market.
C are limited to
. European banks.
D are
. somewhat
illiquid
USD-
denominated
bank
deposits
with fixed
maturity,
and offer the
borrower a
lower
interest rate
than may be
received in
the domestic
market.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 11.2 Describe the eurocurrency market, in particular short-term bank advances,
standby facilities and longer-term syndicated bank loans.
Section: 11.2 Eurocurrency market

16. Which of the following statements concerning a eurodollar
deposit is correct?
A Eurodollar deposits tend to pay yields below

. all marketable securities with similar
maturities owing to their low risk.
B Eurodollar deposits are highly

. liquid and pay interest only at
maturity; hence the yield is
higher than on marketable
securities.
C Eurodollar deposits
. tend to provide
yields above nearly
all marketable
securities with
similar maturities
owing to the higher
FX risk.
D Eurodollar
. deposits
tend to
provide
yields above
nearly all
marketable
securities
with similar
maturities
owing to the
lack of a
secondary
market.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
17. The generally lower default risk of eurocurrency loans is a result

of the fact that:
A eurocurrency markets are more regulated

. than domestic markets.
B loans are made to medium-to-

. large corporations and
governments.
C loans are for very
. high denominations.
D many loans
. only pay
interest at
maturity.
Difficulty: Easy
Est time: <1 minute
18. Which of the following statements regarding the eurocurrency

market is correct?
A. Eurocurrency securities are generally

bearer ones
B Most eurocurrency securities

. are listed on either the
Luxembourg, London or
Singapore stock exchanges
C The market provides
. short-term direct
finance
D The major
. banks
provide
short-term
advances
and
medium- to
long-term
eurocurrenc
y loans
Difficulty: Medium
Est time: <1 minute
19. Compared with a short-term advance in the domestic markets, a

eurocurrency short-term advance:
A. may involve a revolving credit

arrangement.
B is generally denominated in
. US dollars.
C has a rate of interest

. determined by the
borrower's credit
risk.
D is all of the
. given
answers.
Difficulty: Easy
Est time: <1 minute
20. In the euromarkets, the reference rate is usually the rate at which
banks in the market offer funds to each other. All of the
following are reference rates used in the euromarkets except:
A. SIBOR—Singapore Inter-Bank Offered

Rate
B LIMEAN—London Inter-
. Bank Mean
C LIBOR—London
. Inter-Bank Offered
Rate
D LEAR—
. London
Euromarket
Average
Rate
Difficulty: Medium
Est time: <1 minute
21. Which of the following is NOT a feature of a eurocurrency

stand-by facility?
A They act as a backup source of funds to

. issuers of eurocommercial paper.
B They may be drawn upon
. during periods of tight
liquidity.
C They are highly

. reliable as a source
of ongoing funding.
D They are
. generally
arranged for
a period of
up to two
years.
Difficulty: Medium
Est time: <1 minute

22. The main role of a lead manager for a syndicated loan facility
program for a eurocurrency bank loan is to:
A. provide the funds to the

issuer.
B act as an arranger of the debt

. issue, and structure the
facility.
C act as an
. underwriting
syndicate, and
purchase paper not
taken up by the
market.
D provide a
. supporting
guarantee
for the issue.
Difficulty: Medium
Est time: <1 minute

23. Which of the following is NOT a feature of a typical
eurocurrency term loan?
A For large amounts, a syndicate of banks

. can be involved.
B The term of the loan is

. generally between 5 and ten
years.
C Loans are frequently

. drawn down in full
at the
commencement.
D The loans
. are generally
unregistered,
bearer
securities.
Difficulty: Medium
Est time: <1 minute
24. When a eurocurrency syndicated loan facility is arranged, a

participating bank:
A. acts as an
underwriter.
B. acts merely as a provider of

funds.
C is one of the lead

. managers of a
syndicated debt
facility.
D arranges for
. the public
notice
concerning
the loan.
Difficulty: Medium
Est time: <1 minute
25. For a large eurocurrency loan, the _____ generally acts as a

provider of funds.
A. co-manager
B. lead manager
C. participating
manager
D. agent
bank
Difficulty: Medium
Est time: <1 minute

26. In the international financial markets, a euronote is a:
A short-term international security paying

. interest annually.
B short-term international
. security paying interest semi-
annually.
C long-term
. international
security paying
interest annually.
D short-term
. international
security
discounted
at less than
face value.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 11.3 Identify the types, structure, issuance and the price calculation of discount
securities offered in the euronote markets, including euronote issuance facilities (NIF) and eurocommercial
paper (ECP).
Section: 11.3 Euronote market
27. A short-term, discount international security is called:
A. a eurobond.
B. a eurocommercial
paper.
C. a euroCD.
D. a
eurobill.
Difficulty: Medium
Est time: <1 minute

paper (ECP).
28. An important function of an underwriting bank for a euronote

issuance facility (NIF) is to:
A. provide the funding for the

corporation.
B approve the prospectus before

. distribution to the public.
C dilute the
. corporation's
equity.
D buy the
. unsold notes
and resell
them to
investors.
Difficulty: Easy
Est time: <1 minute

paper (ECP).
29. To facilitate the issue of a P-note in the international debt

markets, banks:
A. set up a euronote issuance facility (NIF).
B set up a syndicate of banks to

. underwrite.
C agree to purchase
. any P-notes up to a
predetermined
amount.
D do all of the
. given
answers.
Difficulty: Easy
Est time: <1 minute
paper (ECP).
30. When a syndicated NIF issue is set up:
A. the syndicate of banks may also

underwrite it.
B the agent banks arrange the

. transaction, structuring the
facility and negotiate the price
and terms of the loan.
C the facility agent

. oversees the legal
aspects of the
facility.
D the arranger
. is
responsible
for the
administrati
on of the
facility once
the facility
has been
drawn by the
borrower.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
31. The rate at which an issuer is willing to sell a euronote is called

the:
A. ask
rate.
B. bid
rate.
C. posted rate.
D. going
rate.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
32. According to the text, the primary reason for an underwriters'

syndication for the issue of notes under a euronote issuance
facility is to:
A monitor and coordinate the actions of the

. different underwriters.
B reduce the risk of selling a

. large issue.
C charge higher
. underwriting fees.
D submit a
. combined
bid for
purchase
that the
issuer
compares
with other
bids.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
33. One of the advantages to the corporation of an underwriting

syndicate for the issue of notes under a euronote issuance facility
is that it:
A approves the prospectus before distribution

. to the public.
B submits a combined bid for

. purchase that the corporation
compares with other bids.
C monitors and
. coordinates the
actions of the
different
underwriters.
D gives access
. to a line of
credit
extending
beyond the
life of the
promissory
note.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
34. When a bank sets up a euronote issuance facility for a large

company, it gives the company the benefit of:
A borrowing larger amounts compared with a

. straight loan.
B having a shorter term facility
. compared with a straight loan.
C having higher
. interest costs.
D having a
. more liquid
asset.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
35. The benefit of a euronote issuance facility to a bank is:
A the bank has a more liquid asset on its

. balance sheet.
B the bank can lend the borrower

. smaller amounts and roll them
over at shorter intervals.
C substantial fees are
. involved in the
process.
D the bank can

. issue funds
that are
dearer than
funding
through a
longer-term
facility.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
paper (ECP).
36. A _______ is an unsecured, negotiable, short-term note that is

issued in euromarkets and many domestic markets.
A. eurocurrency term
loan
B. eurocommercial
paper
C. eurobon
d
D euro
. floating rate
note
Difficulty: Medium
Est time: <1 minute
paper (ECP).
37. A _______ is an unsecured, negotiable, medium-term note that is

issued in euromarkets and many domestic markets.
loan
B. eurocommercial
paper
C. eurobon
d
D euro
. floating rate
note
Difficulty: Medium
Est time: <1 minute
paper (ECP).
38. The selling process for a NIF facility involves:
A. a tender
process.
B a panel may include as many

. as 25 financial institutions.
C an issuer specifying
. a posted rate at
which it is prepared
to sell.
D all of the
. given
answers.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
39. Which of the following is NOT a generic feature of euronote

issuance facilities (NIFs)?
A Unconditional bearer P-notes are drawn by

. the borrower in its own name.
B Short-term securities are issued

. with maturities ranging from
30 to 180 days.
C Notes are bearer
. securities.
D Notes are
. issued at a
discount
price, thus
avoiding the
need for a
tender panel.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
40. Which of the following is a key feature of a eurocommercial

paper (ECP) issue?
A An ECP issue is a fixed-interest security

. with annual coupon payments.
B The ECP facility is not
. underwritten by a syndicate of
banks.
C Generally, an issuer
. employs a lead
manager, and often
co-lead managers.
D An ECP
. issue is a
medium-
term facility
with
maturities
generally
longer than
ten years.
Difficulty: Medium
Est time: <1 minute
paper (ECP).

41. Which of the following is a benefit of a eurocommercial paper
(ECP) issue?
A An ECP issue is a fixed-interest security

. with annual coupon payments.
B An ECP issue can deliver

. cheaper funds for best-name
borrowers.
C Generally, only a
. lead manager is
required for an ECP
issue.
D An ECP
. issue is a
medium-
term facility
with
maturities
generally
longer than
ten years.
Difficulty: Medium
Est time: <1 minute

paper (ECP).
42. A eurocommercial paper (ECP) facility:
A involves issues typically more than

. USD750 million.
B involves usually less than 6

. banks for the marketing.
C has a panel that

. agrees to purchase
any paper up to a
predetermined
amount.
D does not
. require the
borrower to
have a high
credit rating
as it uses the
credit
ratings for
the panel of
banks.
Difficulty: Medium
Est time: <1 minute
paper (ECP).
43. In the euromarkets, a medium term note is:
A. an unsecured security with a maturity up

to a year.
B an unsecured bearer discount

. security.
C an unsecured
. security with
maturities up to
15years.
D a bearer
. security that
pays semi-
annual
coupons.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 11.4 Identify the structure and features, and carry out calculations, for the main
securities issued into the eurobond market, that is, medium-term notes, straight bonds and floating rate
notes.
Section: 11.4 Eurobond market
44. An unsecured security sold directly by the issuer into the

euromarkets with a maturity up to 15 years is a/an:
A. NIF
.
B. ECP
.
C. MTN.
D. Global
Note.
Difficulty: Medium
Est time: <1 minute

notes.
45. Medium-term notes (MTNs) issued into the euromarkets may be

defined as having a number of specific features. Which of the
following are features of medium-term notes?
i. Include a range of maturities
ii. Denominated in a range of currencies
iii. May have fixed-rate interest coupons attached
iv. Sold into the market in a single issue
v. May have floating interest rate coupons attached
vi. Issued in various quantities
A. i, ii, iii, iv,

v
B. i, ii, iii, v,
vi
C. i, iii, iv, v,
vi
D All of the
. given
answers
Difficulty: Hard
Est time: <1 minute
notes.
46. Currently the yields for fixed-interest euromarket securities

(MTNs) are 6.5% per annum. An existing MTN with a face
value of USD 1 million, paying 7.3% per annum coupons and
maturing in three years trades currently at a price of:
A. $982 371.28
B. $1 000 000.00
C. $1 049 367.68
D $1 678
. 976.97
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
notes.
47. Which of the following statement is NOT an example of

overseas borrowing by the Australian company Telstra?
A Telstra organises a loan through a major

. bank in Germany.
B Telstra purchases debentures

. from a European company.
C Telstra sells
. eurocommercial
paper in overseas
markets.
D Telstra sells
. debentures
denominated
in Yen to
overseas
investors.
Difficulty: Medium
Est time: <1 minute
notes.
48. A multinational corporation based in the US is issuing GBP

bonds denominated in pounds to be placed in Germany and
Japan. This type of issue is referred to as a:
A. foreign
bond.
B. Yankee
bond.
C. eurobond
.
D domestic
. bond.
Difficulty: Medium
Est time: <1 minute
notes.
49. A eurobond is a:
A. debt instrument sold only in Europe.
B. bond denominated in euros.
C bond sold primarily

. in countries other
than the country of
the currency in
which it is
denominated.
D bond sold
. primarily to
European
investors.
Difficulty: Medium
Est time: <1 minute
notes.
50. Eurobonds are long-term, corporate liabilities that are:
A. owned by European
banks.
B issued only by large

. European companies.
C held by European
. investors.
D marketed in
. all
countries.
Difficulty: Medium
Est time: <1 minute
notes.
51. Which of the following descriptive names refers to a foreign

bond issue by an Australian company into the Japanese capital
markets?
A. Dragon bond
B. Shogun bond
C. Samurai
bond
D. Eurobon
d
Difficulty: Easy
Est time: <1 minute

notes.
52. A/An _______ is a foreign debt security denominated in US

dollars issued into the US capital markets by a Japanese firm.
A. junk
bond
B. Yankee
bond
C. AMEX
bond
D Samurai
. bond
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
notes.

53. Which of the following is NOT a feature of eurobonds?
A. The predominant currency of issue is the

USD.
B The coupon rate of most

. eurobonds is reset every six
months, based on the LIBOR.
C The amount raised

. in a eurobond issue
is generally at least
USD 50 million.
D Most fixed-
. rate issues
are
structured
with the
principal
repayable on
maturity.
Difficulty: Medium
Est time: <1 minute
notes.
54. A probable advantage of Australian dollar eurobonds for

borrowers is that:
A there is a secondary market on the

. Australian Securities Exchange.
B because they are sold in

. Australia, they don't
necessarily require a
prospectus.
C many foreign
. companies have
financing needs in
Australian dollars.
D they are
. generally
registered in
Australia.
Difficulty: Medium
Est time: <1 minute
notes.
55. A large, well-rated company that is looking for a large amount of

long-term financing is likely to issue into the ______ market.
A. eurobill
B. eurocurrenc
y
C. eurobon
d
D. euronote
Difficulty: Medium
Est time: <1 minute
notes.
56. Which of the following is NOT an advantage for eurobond

borrowers or investors?
A They may be rapidly issued into the

. international markets.
B There is a lack of home-

. country regulation.
C The lack of
. regulation in the
countries in which
they are put up for
sale.
D The
. eurobond
underwriters
are not
obliged to
maintain the
bond's
market price
at or above
the issue
price.
Difficulty: Medium
Est time: <1 minute
notes.
57. Announcements of availability of new issues of eurobonds that

appear as advertisements in the financial press are known as:
A. tombstone ads.
B. prospectus ads.
C. red herring ads.

D subscribers
. ' ads.
Difficulty: Easy
Est time: <1 minute
notes.
58. The preliminary prospectus for an issue of eurobonds is called a:
A. letter of
commitment.
B. leading prospectus.
C. red herring.
D. tombston
e.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
notes.
59. A fixed-interest security paying periodic coupons with principal

repaid at maturity issued into the euromarkets is called:
A. a
euronote.
B. eurocurrency
.
C. eurocommercial
paper.
D. a
eurobond.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
notes.

60. Consider the following five statements.
i. A eurobond is a bond issued by a foreign borrower in a

currency that is not the currency of the country in which the
bond is issued.
ii. Eurobonds tend to be bought mainly by banks and

institutional investors, rather than by individuals.
iii. Straight eurobonds are fixed-interest securities with periodic

coupon payments.
iv. FRNs are coupon instruments; however, the coupon is reset

periodically throughout the term of the note.
v. Convertible notes give the holder the option to convert the

bond, on predetermined terms, into another form of instrument
such as equity.
A. 1 statement is true and 4 are false.
B. 3 statements are true and 2

are false.
C 2 statements are
. true and 3 are false.
D 4 statements
. are true and
1 is false.
Difficulty: Hard
Est time: <1 minute
notes.
61. Consider the following five statements.
i. A eurobond is a bond issued by a foreign borrower in a

currency that is not the currency of the country in which the
bond is issued.
ii. Eurobonds tend to be bought mainly by banks and

institutional investors, rather than by individuals.
iii. Straight eurobonds are fixed-interest securities with periodic

coupon payments.
iv. FRNs are coupon instruments; however, the coupon is reset

periodically throughout the term of the note.
v. Convertible notes give the holder the option to convert the

bond, on predetermined terms, into another form of instrument
such as equity.
Which of the following are correct?
A. i, ii, iii and iv are true.

B. i, ii, iv and v are
true.
C. i, ii, and iv are

true.
D i, iii, iv and
. v are true.
Difficulty: Hard
Est time: <1 minute
notes.
62. A euro floating rate note differs from regular eurobonds in that
it:
A. has a longer
maturity.
B. differs substantially in
default risk.
C has coupons that

. are regularly reset.
D. is not
taxed.
Difficulty: Easy
Est time: <1 minute
notes.
63. A _______ is a euromarket, medium- to long-term bearer

security with a rate of interest referenced to LIBOR.
loan
B. eurocommercial
paper
C. eurobon
d
D euro
. floating rate
note
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
notes.
64. Euro floating rate notes are bonds with floating:
A. par
values.
B. maturities.
C. coupon
rates.
D call
. provisions.
Difficulty: Easy
Est time: <1 minute
notes.
65. Which of the following is NOT a feature of euro floating rate

notes (FRNs)?
A. The coupon rates are usually reset every 6

months.
B. FRNs are bearer

securities.
C Many have a call
. option that gives the
investor the right to
sell the bond back to
the issuer prior to
maturity.
D An FRN
. issue is
usually
about USD
100 million.
Difficulty: Medium
Est time: <1 minute
notes.
66. Which of the following is NOT a feature of euro floating rate

notes (FRNs)?
A Typically, FRNs issues are at least

. USD100 million.
B FRNs are a bearer bond issue
. in the euromarkets.
C A FRN call option

. gives the issuer the
right to redeem the
bonds before
maturity.
D As the
. coupon is
adjusted
frequently
over its
lifetime, the
price of the
FRN is quite
volatile.
Difficulty: Medium
Est time: <1 minute
notes.

67. Borrowers who wish to access the euromarkets require a credit
rating of:
A. AA or
above.
B. BB or above.
C. BBB or above.
D. B or
above.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 11.5 Consider the operation of the US money and capital markets and the structure of
US commercial paper, US foreign bonds and American depositary receipts.
Section: 11.5 Markets in the USA

68. Borrowers who wish to access the deep US capital markets
require a credit rating of:
A. AA or
above.
B. BB or above.
C. BBB or above.
D. B or
above.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

69. The key difference between a Yankee bond and a US dollar
eurobond is:
A a Yankee bond is issued by a US company

. into the US capital markets.
B a Yankee bond is issued by a

. company in Japan but is
denominated in US dollars.
C a US dollar
. eurobond is issued
by a foreign
company into the
US capital markets.
D a Yankee
. bond is
issued by a
foreign
company
into the US
capital
markets.
Difficulty: Medium
Est time: <1 minute

70. Corporations can use the shelf registration method for Yankee
bonds, because:
A pre-registered securities can be quickly

. brought to market.
B the main registration period is

. eliminated for up to three
years.
C investment bankers
. prefer to handle
issues this way.
D investment
. bankers earn
more fees in
the process.
Difficulty: Medium
Est time: <1 minute

71. An American depository receipt is:
A a security issued by a foreign company that

. is listed only on the New York Stock
Exchange.
B a security issued by a foreign

. company that is listed on both
the New York Stock Exchange
and the American Stock
Exchange.
C a security issued by
. a US bank and
evidenced by a
depository share.
D a foreign
. share that
has a
multiple
listing both
in the US
and its
domestic
market, and
needs to pay
a deposit
before
listing.
Difficulty: Easy
Est time: <1 minute
72. An ADR program that has the ADRs listed on one or more US
exchange but not sold as a public offering is a _______ form of
ADR program.
A. level-one
B. level-
two
C. level-
three
D. level-
four
Difficulty: Hard
Est time: <1 minute
73. Which of the following is NOT correct regarding ADRs?
A. The ADR market is deep and

liquid.
B An ADR facility can be

. established for private
placement of new shares in
accordance with Rule 154A of
the Securities Act 1963.
C A depository share
. is generally
composed of more
than one share of the
foreign issuer.
D Currently
. there are a
large
number of
depository
receipts,
traded in
many
countries.
Difficulty: Hard
Est time: <1 minute
74. The advantage(s) of an ADR program for a corporation is/are:
A it affords a company access to the large US

. capital markets.
B it increases the profile of a
. company expanding
internationally.
C it provides a broader
. investor base for the
corporation.
D all of the
. given
answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
75. Which of the following is NOT an advantage for US investors in

ADRs?
A. ADRs are paid dividends in US dollars.
B ADRs are denominated in

. US dollars.
C ADRs are subject to
. US legal
jurisdiction.
D The ADR
. market is
relatively
illiquid.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
76. Debt issues with a credit rating of ________ and above are
regarded as investment grade by the S&P rating agency.
A. BC
C
B. BB-
C. BB
B
D. BB
+
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 11.6 Recognise the important roles and functions of credit rating agencies and explain
the credit rating process.
Section: 11.6 Credit rating agencies
77. Which of the following is NOT a major factor in the credit rating
process conducted by agencies such as Standard & 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 to
the
particular
issue
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
78. When a debt security is issued and its performance does not meet
the expectations of the S&P rating agency, the debt rating may
be placed initially on:
A. credit hold.
B. credit downgrade.
C. credit watch.
D. credit
notice.
Difficulty: Easy
Est time: <1 minute
79. The higher the credit rating given to a bond issue:
A. the higher the credit

risk.
B. the higher the yield.
C. the lower the

yield.
D the higher
. the country
risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
80. International capital markets provide an important source of

funding for Australian corporations, financial institutions and
government authorities. Which of the following factors have
contributed significantly to international capital market access?
A Rapid development of the euromarkets and

. foreign bond markets
B Application of new technology

. to support product
development and delivery
C Removal of foreign
. exchange controls in
the Australian
market
D All of the
. given
choices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
81. The provision attached to a debt security that enables the holder
to sell it to another party is called a:
A. purchase
agreement.
B. sell-down provision.
C. trade
provision.
D vendor
. provision.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 11.7 Describe novation, subparticipation and transferable loan certificates.
Section: Extended Learning
82. Under a/an _____ agreement, the original lender may transfer all
the rights and obligations of the original loan agreement to a
third party.
A. assignable
B. convertible
C. novation
D. redeemabl
e
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
83. Under ______ provisions, the original lender of funds may

transfer its rights (to receive interest and principal repayments) to
a third party in exchange for payment.
A. assignable
B. convertible
C. novation
D sub-
. participatio
n
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
84. The provision that allows a lender to convert a loan into saleable
certificates with the same terms and conditions is called:
A. assignable loan credentials
B. convertible loan credentials
C transferable loan
. certificates
D. novation
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
85. One of the advantages of attaching a provision with a loan for it

to be converted into a transferable loan certificate is that:
A the original lender receives interest

. payments from the new holder.
B the loan is off the balance

. sheet of the original lender.
C the certificate can be

. sold to third parties
who receive interest
payments from the
original lender.
D the loan
. remains on
the books of
the original
lender.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
86. Compared with a euronote issuance facility, transferable loan

certificates are:
A. issued directly into the euromarkets by the

bank.
B intermediated loans by the

. bank involved.
C funded by the
. borrower selling into
the euromarkets.
D unregistered
. bearer
securities.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
87. Loans with provisions that allow their conversion into securities
and sale with an endorsement to third parties (who are then
registered as the new lenders) are:
A. eurocurrency medium-term
notes.
B. transferable loan
certificates.
C. sub-participating
loans.
D novation
. loans.
88. Which of the following does NOT relate to a convertible

eurobond?
A A convertible bond contains an option for

. the holder to receive the redemption
proceeds in another form.
B Convertible bonds may

. alleviate the foreign exchange
risk of investors by being
denominated in their currency.
C Investors cannot
. usually participate in
rights issues, in
contrast with those
investing in straight
eurobonds.
D For an
. equity-
related
convertible
bond, an
investor
could
benefit from
increased
equity
prices.
89. The eurocurrency markets are large wholesale markets that

involve large amounts of short-term direct financing.
FALSE
The eurocurrency markets are the euromarkets that provide

intermediated bank finance.
90. Euromarket bankers can narrow the spread between deposit and
lending interest rates since the operating costs per dollar are
lower than those faced in domestic markets.
TRUE
The euromarkets do not deal in small retail market transactions

and so their administrative and operating costs are lower. In
addition, loans tend to be for large amounts to medium and large
corporations, financial institutions, governments and government
agencies and so credit information costs are lower. Overall, their
costs tend to be lower per dollar of business transacted.
91. A eurodollar is an AUD-denominated bank deposit held in a
bank outside Australia.
FALSE
A eurodollar is a US-denominated deposit where US dollars are

held outside the USA.
92. A short-term bank advance in the eurocurrency markets may be

extended to a revolving credit arrangement whereby the bank
agrees to roll over the loan facility.
TRUE
A short-term advance can be extended to provide an ongoing

facility.
93. A eurocommercial paper facility is an arrangement where P-
notes are issued without an underwriter.
TRUE
The best name borrowers in the eurocommercial paper market

are able to issue P-notes without an underwriter.
94. Eurobonds are generally discount bonds, unlike foreign bonds

that pay periodic interest coupons.
FALSE
A straight eurobond is a long-term coupon-paying debt

instrument.
95. Euro floating rate notes are actually bearer bonds issued in the
euromarkets that have their coupon reset periodically.
TRUE
A euro floating rate note is a bearer bond issued without a fixed

coupon. It has its coupon reset generally every six months.
96. Foreign issuers who wish to issue any short-term debt securities
into the US debt markets are allowed to do so under rule 144A.
FALSE
Rule 144A only allows privately registered securities to be

placed with qualified institutional investors.
97. A Yankee bond is a bond that is issued by a US company into a

foreign country and denominated in that country's currency.
FALSE
A Yankee bond is a bond that is issued by a foreign company

into the USA and denominated US dollars.
98. Using American depository receipts, a foreign borrower may

issue new equity to the public in the US market with the aid of a
custodian bank in that country.
TRUE
An ADR program allows a foreign company that otherwise may

not have been able to met SEC listing requirements to access the
US capital markets.
99. Discuss the features of a eurobond issue.
Eurobonds are sold in a multi-stage process. It is organised by a

lead manager who invites other banks to be co-managers in a
management group that prepares the bond issue, sets conditions,
underwriters and selling groups. There is a period when the lead
manager and borrower discuss terms and the manager prepares
the documentation. After this comes the announcement day for
the issue and a week or so later the final terms are set and bonds
are offered on the offering day. At the end of a public placement
the subscription is closed and the bonds are delivered in
exchange for cash to the borrower. Successful completion is
marked by an advertisement in the international financial press,
which identifies the borrower, the nature of the instruments
involved and lists the participating banks.
100. Discuss the features of short-term bank advances in the

eurocurrency markets. How does it differ from that obtained
through a domestic bank?
The eurocurrency markets are the part of the eurocurrency

markets involving intermediated bank finance. Short-term bank
advances are a major part of eurocurrency markets and have a
similar format to domestic term loans or fully drawn advances.
The term is negotiated with a bank and is drawn down after
approval. Borrowers are charged a commitment fee if the loan is
not drawn down immediately. There is no provision for early
repayment and at the end of the loan term, both the principal and
interest are repaid as a lump sum. A revolving credit
arrangement may be set up to extend the term. They differ from
domestic advances in size of the advances, typically USD1
million amounts and type of repayment schedule with the
principal and interest payment at the end.
101. Discuss the structure and features of a euronote facility.
A euronote facility is one where a borrower may obtain funds by

issuing short-term, underwritten P-notes in the borrower's own
name. The P-notes are bearer discount securities, usually in the
range of 30 to 180 days, with the face value being payable to the
holder at maturity.
102. What are the features of a floating rate note? Outline some
possible factors that may have led to their development.
Floating rate notes are bearer bonds of large denominations

issued in the euromarkets that have a rate of interest related to a
nominated reference interest rate such as LIBOR. Usually the
interest rate is reset every six months. Generally an FRN issuer
will pay a margin above the reference interest rate. One factor
that has led to their development is the volatility of interest rates.
Lenders for floating rate notes have the flexibility to adjust the
interest rates, which has the effect of keeping the price of the
instrument quite stable over its life.
103. US commercial paper is an important short-term security for

both US and foreign borrowers. Outline the features that have led
to its importance.
The US money and capital markets have traditionally been the

most liquid and deepest in the world. As a result foreign
borrowers have wanted to access these funds. Because of its less
onerous regulatory environment for commercial paper, US
commercial paper markets have been a vast, liquid money
market and a significant provider of funds companies and
securitisation vehicles up to the credit crisis of 2007. At the
current time interest rates have come down but companies are
still finding it difficult to borrow in it.
Chapter 12
1. The policy where a central bank influences the level of short-term interest rates in
order to affect inflation is:
A. fiscal
policy.
B. economic
policy.
C. monetary
policy.
D. inflation rate
policy.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.1 Consider the reasons for the existence of government debt markets and the government borrowing requirement.
2. The management of the revenues and expenditure of a government is called:
A. monetary
policy.
B. fiscal
policy.
C. debt
management.
D. economic
policy.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Which of the following statements in relation to the Australian Commonwealth
government's borrowing programs is incorrect?
A. The early 1990s saw an increase in debt issues to fund the budget deficits
at that time.
B. The government tends to fund short-term liquidity requirements with

the issue of Treasury notes.
C When government income exceeds forecast expenditures, the

. resulting deficit tends to be funded by short-term debt.
D Fiscal constraint by successive Australian governments for the

. second part of the 1990s brought the government budgets
back into surplus until recently.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 12.1 The Commonwealth Government borrowing requirement

4. Which of the following statements in relation to the Commonwealth Government's
borrowing programs is incorrect?
A. The government must issue longer term paper to fund its budget surplus
B. Treasury notes can be issued to manage intra-year

liquidity
C. Debt issues are used to finance seasonal deficit/surplus

patterns
D The past few years have seen a decrease in debt issuance to

. fund the budget
Difficulty: Medium
Est time: <1 minute

5. If a government's income from tax receipts exceeds its expenditure, the
government is running a:
A. deficit, and is a net borrower of funds.
B. surplus, and is a net borrower of

funds.
C. deficit, and is a net saver of funds.
D. surplus, and is a net saver of

funds.
Difficulty: Easy
Est time: <1 minute

6. When a government undertakes a significant reduction in government recurrent
expenditure this is known as:
A. fiscal
recession.
B. fiscal constraint.
C. matching
principle.
D. capital expenditure shortfalls.
Difficulty: Easy
Est time: <1 minute

7. When a government's budget is in _____, it is required to issue new government
securities, and when the budget is in _______, it may retire maturing debt and
redeem some debt prior to maturity.
A. surplus; surplus
B. deficit; surplus
C. deficit;
deficit
D. surplus; deficit
Difficulty: Easy
Est time: <1 minute
8. If a government's budget is in surplus, it may:
A. issue more
securities.
B. retire maturing securities.
C. issue more long-term

securities.
D. allow the institutions to hold less government

debt.
Difficulty: Medium
Est time: <1 minute
9. Participants in the financial markets seek to hold government paper because:
A. Investors can sell the paper quickly to raise

funds.
B. Government securities pay a steady rate of return.
C banks are required to hold government securities as part of

. liquidity management.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. When the Australian government faces month-by-month mismatches between

inflow of funds and cash outflows it may issue:
A. Treasury
bonds.
B. Treasury
bills.
C. Treasury
notes.
D. Treasury
paper.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When the government demand for funding reduces the available funds within a
nation-state this is known as:
A. fiscal constraint.
B. illiquidity
effect.
C. crowding-out
effect.
D. capital expenditure
effect.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. The crowding-out effect refers to:
A. corporate borrowing exceeding government borrowing.
B. government borrowing reducing the available funds for

borrowing.
C. heavy long-term borrowing by

government.
D. corporations issuing securities of long
maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. Other things being equal, an increase in the government budget deficit:
A. can increase business

prospects.
B. can force interest rates down.
C. can force interest rates

up.
D. may not have any effect on interest rates.

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
14. Which of the following is NOT a feature of types of Treasury bonds that are
currently issued by the Commonwealth Government?
A. A fixed-interest security that pays half-yearly coupon

payments
B. Issued with a face value which is repayable at

maturity
C. Existing Treasury bond issues are exposed to price

risk
D. Issued as either a bearer bond or as inscribed stock
Difficulty: Medium
Est time: <1 minute

Learning Objective: 12.2 Outline features of the main debt instruments issued by the Commonwealth Government, that is, the Treasury
bond and the Treasury note, and describe the issuance process, participants and complete relevant calculations.
Section: 12.2 Commonwealth Government securities
15. The advantages associated with the issue of inscribed stock for bond issues are:
A. it is less costly to maintain a register of bond holders than print and

distribute physical bonds.
B. inscribed stock protects holders from risk of theft.
C. coupon payments are easily made electronically to the registered

holders.
Difficulty: Medium
Est time: <1 minute

16. The inscribed stock system for selling Treasury bonds was introduced in:
A. 1979
B. 1980
C. 1982
D. 1984
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
17. Which of the following about the primary market issue of Treasury bonds is
correct?
A. Treasury bonds are issued by a tender

system.
B. Treasury bonds are issued by the ‘tap' system of
selling.
C. The issue of Treasury bonds is currently managed by the

RBA.
D The minimum bid for treasury bonds must be for a face value
. of $1000 000.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
18. Which of the following procedures for bidding for Australian Treasury bonds is
NOT correct?
A. Bids must be submitted electronically by registered bidders.
B. The minimum bid must be for a face value of $1 million and

multiples thereafter.
C. Bids are made in terms of prices up to three decimal

places.
D. Bids are accepted in ascending
order.
Difficulty: Medium
Est time: <1 minute
19. Which of the following about the primary market issue of Treasury bonds is NOT
correct?
A. The issues are currently managed by

AOFM.
B. Tenders will be lodged to buy the bonds in terms of yield to

maturity.
C. The minimum bid must be for a face value of $1

million.
D. Bids are accepted in descending order: that is highest-yield
first.
Difficulty: Medium
Est time: <1 minute
20. Which of the following statements regarding the Treasury bond tender system is
correct?
A. The timing of Treasury bond tenders is set each year in the government's
budget papers.
B. Buyers of bonds effectively nominate the price at which they

purchase the bond.
C. The tender system removes the need for a secondary market in

Treasury bonds.
D The maturities and quantities of bond tenders are determined
. by the Loan Council.
Difficulty: Medium
Est time: <1 minute
21. Which of the following statements is correct for the current system of bidding for
government bond tenders?
A. Bids must be in terms of price.
B. Bids are accepted in terms that correspond to the highest

price.
C. The minimum bid must be for a face value of $500

000.
D. The maximum limit for a total amount is $100
million.
Difficulty: Medium
Est time: <1 minute
22. The selling of Government bonds is currently handled by:
A. APRA.
B. ARB.
C. AOFM
.
D. Austraclear
.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
23. A Treasury bond holder who wishes to redeem a bond early may sell it:
A. back to
Treasury.
B. back to the central bank.
C. in the secondary
market.
D. back to the
broker.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
24. If market interest rates move upwards after an investor buys a government bond,
the investor may:
A. sell the bond back to

Treasury.
B. sell the bond in the secondary markets for a capital loss.
C. sell the bond in the secondary markets for a capital

gain.
D hold the bond until the market rates return to their original
. level and then have a capital gain.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
25. Government securities generally:
A. are highly liquid instruments, especially the short-term ones.
B. have an active secondary market.
C. are regarded as fault-

free.
D. meet all of the given
answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
26. Government securities are generally:
A. illiquid
.
B. issued when a government's budget is in

surplus.
C. highly negotiable.
D. coupon-paying debt securities.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. Until _______, purchasers of new-issue Treasury bonds could hold them either as
bearer bonds or inscribed stock.
A. 1979
B. 1984
C. 1987
D. 1992
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

28. Which of the following procedures is NOT true for bidding for Treasury bonds
under the tender system?
A. Only bids submitted electronically by registered bidders through AOFM

tender system are accepted.
B. Minimum bid must be for $1 000 000 and multiples of $1 000 000
thereafter.
C. Bids are made in terms of yield to maturity up to three decimal

places.
D Bids are accepted in descending order; that is, the lowest

. price is allotted first.
Difficulty: Medium
Est time: <1 minute

29. Which of the following is NOT an advantage associated with the issue of inscribed
stock?
A. It is expensive to print and distribute the physical instrument.
B. Without a register, there is a potential for non-disclosure of

income.
C. It protects the holder from the risk of capital

loss.
D. It protects the holder from the risks of theft or misplacement.
Difficulty: Medium
Est time: <1 minute

30. With a/an ______ stock issue, ownership is registered electronically and a receipt
is issued.
A. bearer
B. submitte
d
C. inscribed
D. tendere
d
Difficulty: Medium
Est time: <1 minute

31. When bonds are traded in either the primary or secondary markets in Australia,
they are quoted in terms of their:
A. current
yield.
B. current
price.
C. redemption yield.
D. annual interest, divided by the face value.
Difficulty: Easy
Est time: <1 minute

32. The total return of interest and capital gains received by an investor when a
security is held to maturity is called:
A. current
yield.
B. maturity
yield.
C. historical yield.
D. redemption yield.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

33. Which of the following statements regarding the secondary market for Australian
government securities is incorrect?
A. The volume of on-exchange trades of government securities is very high.
B. Treasury notes and bonds may be listed on the Australian Securities

Exchange (ASX).
C. Banks buy and sell government securities to manage their

operational liquidity.
D All wholesale electronic transactions involving

. Commonwealth government securities are settled through
Austraclear.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

34. For government securities listed on the ASX, there is a higher volume of off-
exchange trades compared with on-exchange transactions because:
A. of difficulties in
payment.
B. greater profits may be

made.
C. of brokers that can act as an agent between two

parties.
D. of the high fees

involved.
Difficulty: Medium
Est time: <1 minute

35. Which of the following financial institutions currently has the largest holdings of
Commonwealth Government securities?
A. A state government public

authority
B. The Reserve Bank of

Australia
C. General insurance
offices
D. Life assurance
offices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

36. Financial institutions hold government securities because of:
A. liquidity requirements.
B. interest rate
expectations.
C. funding
requirements.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

37. If interest rates move lower after a Treasury note is issued, a holder selling it into
the secondary markets:
A. receives a capital gain.
B. receives a capital
loss.
C receives the original price, as short-term markets are not so

. affected by interest rate movements.
D. receives a higher yield owing to the time elapsed.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

38. When an institution buys government securities, it settles the transaction by:
A. sending the seller of the security a cheque.
B. sending the funds to the

broker.
C. using the clearing house

Austraclear.
D. sending funds electronically to the seller via a bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

39. Which of the following about Treasury bonds is NOT correct?
A. Banks invest excess short-term funds in Treasury bonds as they are

liquid.
B. A financial institution with a need for funds can quickly sell some its
government securities.
C. Treasury bonds can be held to manage the maturity profile of a

bond portfolio.
D Commercial banks are required by the prudential supervisor

. to hold a prescribed number of Treasury bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

40. When the current market interest rates rise, the price of bonds:
A. goes
up.
B. goes down.
C. is unchanged.
D. may go up or down or be unchanged, depending on

conditions.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

41. Which of the following about Treasury bonds is NOT correct?
A. The volume of over-the-counter transactions for Treasury bonds is far

larger than the volume of on-exchange trades.
B. Banks hold Treasury bonds for liquidity

management.
C If fund managers expect interest rates to fall they may decrease

. their holdings of long-term Treasury bonds.
D The Reserve Bank of Australia holds government securities as

. part of monetary policy.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

42. Australian government securities that are short-term are:
A. Treasury
bills.
B. Treasury
notes.
C. Treasury
paper.
D. Treasury
bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

43. Which of the following about Australian Treasury notes is incorrect?
A. Australian Treasury notes are discount

securities.
B. The minimum bid must be for a face value of $1

million.
C. Bids are accepted in ascending order; that is lowest-

yield.
D. Bids are made in terms of yield to maturity up to three

decimal places.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

44. In Australia a Treasury bond differs from a Treasury note in that it:
A. is issued for a period less than a

year.
B. pays interest quarterly, unlike the monthly interest payments for a

Treasury note.
C. is a discount
instrument.
D. is a longer term coupon

security.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

45. Which of the following is NOT a feature or function of Treasury notes (T-notes)?
A. T-notes are issued with short-term

maturities.
B. T-notes are discount securities; that is, they are sold at a price below
face value.
C. Coupon payment, plus the face value, is paid at

maturity.
D. T-notes are used to manage the liquidity for the

government.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

46. Compared with a Treasury bond, a Treasury note:
A. pays a higher interest

rate.
B. is sold at a price below its face

value.
C. is sold in terms of price to the highest

bidder.
D. has a higher
yield.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

47. Which of the following is NOT a feature of the tendering of Treasury notes (T-
notes) in Australia?
A. T-notes are issued by

tender.
B. The registered bidders of the AFOM submit their bids

electronically.
C. Successful bidders settle their purchases through

Austraclear.
D. Each bid must be for a minimum parcel of $100

000.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

48. A bank puts in a bid for $500 000 of 182-day Treasury notes at a yield of 5.8% per
annum. What price will the bank pay if the tender is successful?
A. $448 028.67
B. $485 756.54
C. $485 946.17
D. $486 101.73
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

49. A bank is considering purchasing a Treasury note with a face value of $500 000
that is currently selling for $487 324, with 180 days to maturity. What is the note
currently yielding?
A. 4.90
%
B. 5.14
%
C. 5.27
%
D. 5.41
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

50. On Tuesday, the Reserve Bank announces details of a 26-week T-note tender, with
competitive bids to close on Wednesday. A bank lodged a successful bid for $5
000 000 in T-notes at a yield of 6.57% per annum. Settlement is required on
Thursday through RITS. What amount will the bank need to pay on settlement?
A. $4 841 395.87
B. $4 843 084.08
C. $4 988 327.31
D. $4 998 362.54
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

51. A funds manager is revaluing his/her investment portfolio, which includes a $2 000
000 holding of Treasury bonds. The bonds pay a coupon of 10% per annum,
payable half-yearly. A coupon payment has just been made, and the bonds have
exactly five years to maturity. Similar bonds are currently yielding 12% per annum
in the market. What is the value of the fund manager's Treasury bond portfolio?
A. $1 495 331.33
B. $1 620 921.33
C. $1 852 798.26
D. $2 000 000.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

52. Which of the following is NOT an advantage for a state's central borrowing
authority?
A. By grouping issues as a single one, lower economies of scale can be

obtained.
B. Potential conflict between different debt issuers may be overcome.
C The timing of debt issues can be controlled so they are brought to

. the market at the most opportune time.
D The central borrowing authority can do a public issue more

. effectively than a private placement.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.3 Describe the purpose and structure of state government central borrowing authorities.
Section: 12.3 State Government securities

53. The Commonwealth Government currently issues Treasury notes with varying
terms to maturity:
A. twice a
year.
B. three times a
year.
C. four times a
year.
D. to match the government's main revenue receipt dates.
Difficulty: Medium
Est time: <1 minute

54. The Reserve Bank of Australia's monetary policy is directed to influence first:
A. money market
rates.
B. Treasury notes interest

rates.
C. the overnight cash

rate.
D. the base bank interest

rates.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 12.4 Outline the monetary policy techniques currently employed by the Reserve Bank through which it influences the
level of interest rates in Australia, including open market operations and the impacts on system liquidity.
Section: 12.4 Monetary policy

55. The transmission channel related to changing the money supply, followed by
changes in short-term rates and pressure on interest rates to change the cost of
funds, and consequently to influence economic activity, is known as a:
A. credit
channel.
B. monetary policy
channel.
C. foreign exchange
channel.
D. wealth
channel.
Difficulty: Easy
Est time: <1 minute

56. The transmission channel related to changing the money supply to change the
pattern of bank lending and the availability of funds, to influence economic
activity, is known as a:
A. credit
channel.
B. monetary policy
channel.
C. foreign exchange
channel.
D. wealth
channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

57. When actions by the Australian Reserve Bank affect bank lending and
consequently borrowers find it more difficult to find funding, this effect is called
the:
A. monetary
channel.
B. credit
channel.
C. wealth
channel.
D. foreign exchange
channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

58. The transmission channel that affects the value of assets and liabilities within the
domestic economy, and thus influences economic activity, is known as a:
A. credit
channel.
B. monetary policy
channel.
C. foreign exchange
channel.
D. wealth
channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

59. The transmission channel that eventually affects the demand for Australian exports
and imports by affecting their relative costs, and thus influences economic activity,
is known as a:
A. credit
channel.
B. monetary policy
channel.
C. foreign exchange
channel.
D. wealth
channel.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

60. Open market operations by the Australian Reserve Bank refer to:
A. the method by which the Australian Reserve Bank allows banks to raise
short-term funds up to a year.
B. the method by which the Australian Reserve Bank implements

monetary policy.
C. the market for short-term securities.
D the method by which the Australian Reserve Bank monitors

. the financial sector.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

61. Monetary policy in Australia is implemented by the Reserve Bank, and is currently
principally directed towards:
A. affecting the level of short-term interest

rates.
B. effecting a reduction in the current account

deficit.
C. affecting the level of growth in the money

supply.
D. affecting the value of the AUD, and the exchange

rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

62. The Reserve Bank focuses much of its attention on the level of underlying inflation
in the Australian economy. What are the important implications of a low level of
underlying inflation for the markets?
A. A low level of underlying inflation restricts the potential for future

economic growth and business investment.
B. The Reserve Bank needs to maintain tight monetary policy to ensure

inflation remains low.
C A low level of underlying inflation leads to increased business

. confidence and capital investment.
D A low level of underlying inflation adds to expectations of

. significant future interest rate increases.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

63. The main method the Australian Reserve Bank uses to manage the money market
cash position is:
A. conducting FX transactions.
B. issuing Treasury
bonds.
C. managing the amount of Commonwealth securities in the

market.
D. issuing Treasury
notes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

64. Price stability is desirable because:
A. everyone is better off when prices are

stable.
B. inflation creates uncertainty about future

planning.
C. it guarantees full unemployment.
D. it increases the efficiency of the Australian Reserve

Bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

65. The Reserve Bank conducts market operations in order to effect its monetary
policy objectives. Which of the following best describes the Reserve Bank's market
operations?
A. Market operations may be conducted to neutralise official FX

transactions.
B. Reserve Bank market operations target the overnight cash

rate.
C. Market operations affect day-to-day system

liquidity.
D. All of the given answers are

correct.
Difficulty: Medium
Est time: <1 minute

66. The use of open-market operations as a monetary tool has the advantage that:
A. they can be implemented rapidly, without administrative

delays.
B. they are flexible and

precise.
C. they can be easily reversed if errors are made.
Difficulty: Easy
Est time: <1 minute
67. When the Australian Reserve Bank sells Commonwealth government securities, it:
A. injects extra cash into the financial

markets.
B. loosens monetary
policy.
C. puts downward pressure on interest rates.
D. tightens monetary
policy.
Difficulty: Medium
Est time: <1 minute
68. If the Australian Reserve Bank wants to decrease the money supply in the long
term, it will:
A. buy repurchase
agreements.
B. buy Commonwealth government

securities.
C. lower the cash

rate.
D. sell Commonwealth government
securities.
Difficulty: Medium
Est time: <1 minute
69. Which of the following is NOT true of tightening of monetary policy?
A. Banks' supplies of funds are depleted through open-market

operations
B. Interest rates fall
C. The dollar may increase in

value
D. Bank lending is
reduced
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. When an easing of monetary policy is accomplished by open-market operations:
A. interest rates
rise.
B. banks' supplies of funds are

increased.
C. the dollar appreciates.
D. bank lending generally decreases.

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
71. If the Australian Reserve Bank wants to expand the money supply, it will:
A. buy Commonwealth government

securities.
B. increase the cash

rate.
C. sell Commonwealth government

securities.
D. sell repurchase
agreements.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

72. When the Australian Reserve Bank wants to ease the monetary policy, it will:
A. sell Commonwealth government

securities.
B. increase the overnight cash rate.
C. buy Commonwealth government

securities.
D. sell repurchase
agreements.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

73. The main types of Commonwealth government transactions that influence the daily
cash positions are:
A. taxation
receipts.
B. government
receipts.
C. budget
expenditures.
Difficulty: Easy
Est time: <1 minute

74. The short-term interest rate that is almost immediately affected by changes in the
Reserve Bank's monetary policy is the:
A. real interest
rate.
B. overnight interbank rate.
C. 30-day bank bill rate.
D. intercompany lending rate.
Difficulty: Easy
Est time: <1 minute

75. In relation to impacts on the Australian financial system liquidity, if payments from
the official sector to the private sector exceed the flow of funds to the official
sector then there will be:
A. a system
down.
B. a system surplus.
C. a system
deficit.
D. a system
square.
Difficulty: Medium
Est time: <1 minute

76. In relation to impacts on the Australian financial system liquidity, if payments to
the official sector exceed official payments to the private sector then there will be:
A. a system
down.
B. a system surplus.
C. a system
deficit.
D. a system
square.
Difficulty: Medium
Est time: <1 minute

77. Through its impact on cash rates, the Reserve Bank can affect rates further out on
the maturity spectrum. What is usually the order of transmission?
A. Cash rates; commercial bill yields; banks' deposit rates; banks' prime
lending rates
B. Cash rates; commercial bill yields; banks' prime lending rates; banks'
deposit rates
C Cash rates; banks' deposit rates; commercial bill yields; banks'

. prime lending rates
D Cash rates; banks' prime lending rates; commercial bill yields;

. banks' deposit rates
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

78. Banks are required to maintain exchange settlement accounts with the Reserve
Bank. Settlement of exchange settlement account transactions requires the use of
same-day funds. Which of the following is NOT generally a source of same-day
funds?
A. Repurchase arrangements with the Reserve

Bank
B. Reserve Bank payments in its market

operations
C. Commonwealth government securities held for liquidity

purposes
D. Surplus balances in banks' exchange settlement accounts
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 12.5 Describe the purpose and operation of the payments system, including exchange settlement accounts, real-time
gross settlement and repurchase agreements.
Section: 12.5 The payments system

79. In relation to the payments system the huge number of low-value transactions is:
A. cleared by real-time gross

settlement.
B. netted and settled at the end of each

day.
C settled immediately by banks' settlement accounts at the Reserve

. Bank of Australia.
D. netted and settled through banks dealing with

Austraclear.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

80. The payment clearing system that settles trades in Commonwealth Government
securities is:
A. APCA.
B. MasterCard.
C. Austraclear
.
D. CHESS.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

81. The greatest monetary value of payments in the Australian financial system occurs
for:
A. cash
.
B. non-cash
payments.
C. debt securities.
D. equity
securities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

82. The special account that providers of payment services have at the Reserve Bank is
called a/an:
A. balance of payments
account.
B. exchange settlement account.
C. payment services
account.
D. Reserve Bank payment

account.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

83. The Reserve Bank provides an end-of-day repurchase arrangement for banks to
enable them to manage their exchange settlement account liquidity position. Which
of the following terms and conditions is attached to repurchase arrangements?
A. T-notes with maturities of less than 91 days may be

discounted.
B. A penalty margin of 0.25% is applied to all repurchase

transactions.
C. The Reserve Bank publishes its rediscount rate

daily.
D. All of the given

answers.
Difficulty: Medium
Est time: <1 minute

84. Banks frequently engage in repurchase agreements to:
A. manage
liquidity.
B. take advantage of anticipated changes in interest

rates.
C. lend or borrow for a day or two with what is basically a

collaterised loan.
D. do all of the given answers.
Difficulty: Medium
Est time: <1 minute

85. Repurchase agreements are:
A. usually collaterised with Commonwealth Government

securities.
B. usually low-interest rate

loans.
C. usually loans that have real assets as

collateral.

answers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

86. For a debt payment system, the processing of the payment begins at the:
A. payer's financial institution.
B. payee's financial
institution.
C. Australian Reserve Bank.
D. exchange settlement account of the

payer.
Difficulty: Medium
Est time: <1 minute
87. For a credit payment system, the processing of the payment begins at the:
A. payer's financial institution.

B. payee's financial
institution.
C. Australian Reserve Bank.
D. exchange settlement account of the

payee.
Difficulty: Medium
Est time: <1 minute
88. Which of the following statements regarding real-time gross settlement (RTGS) is
incorrect?
A. High-value payment transactions that are settled immediately require

transfer of the monies held in settlement accounts of the respective banks
at the Reserve Bank.
B. The aim of RTGS is to minimise potential systematic

risk.
C. High-value transactions are those involving more than $100
000.
D RITS and Austraclear are the two providers recognised by the

. Australian Reserve Bank as providers of RTGS.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
89. When there is a significant reduction in recurrent government expenditures, the

process is known as fiscal limitation.
FALSE
The process is known as fiscal restraint when there is a significant reduction in

recurrent government expenditure.
Difficulty: Medium
Est time: <1 minute
90. An investor might hold government securities as part of a portfolio to lower its
risk.
TRUE
Government securities are considered to be risk free as under normal circumstances

a government does not default on its debt.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

91. There is often a crowding-out effect when a government deficit is high and the
government issues large amounts of long-term bonds.
TRUE
When a government needs to borrow as a result of a deficit, its demand for funds
will reduce the amount of funds in the overall economy.
Difficulty: Medium
Est time: <1 minute
92. Treasury bonds are not bearer securities and so coupon payments are made
electronically to holders.
TRUE
There is an electronic registry to keep track of Treasury bond holders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

93. The AOFM on behalf of the federal treasurer has the power to decide on the
timing, maturities and quantities of Treasury bonds but their price is decided by
tender.
TRUE
The primary market for Treasury bonds is based on a tender system where
investors bid on price.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
94. If a bond issue is announced carrying a coupon of 5 per cent per annum and an
investor requires a greater rate of return, they will put in a bid price below the face
value in order to try to get the higher yield they require.
TRUE
If current market interest rates have changed, an investor will put in a lower bid so
that the existing coupon plus the capital gain on maturity gives a higher yield.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
95. For bond issues through the AOFM, bids are made in terms of price up to three
decimal places.
FALSE
Bids are made in terms of yield to maturity up to three decimal places.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

96. Since each state government is responsible for providing a wide range of services,
every state has its own borrowing authority to issue debt securities.
TRUE
Each Australian state has formed a central borrowing authority to undertake

borrowings on behalf of the state government and its instrumentalities.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
97. If the Australian Reserve Bank, through its monetary policy market operations,
buys government securities, this will lead to an easing of interest rates.
TRUE
When the Reserve Bank of Australia buys government securities, the sellers of the
securities receive funds and, in the case of banks, have more funds for lending out,
leading to a drop in interest rates.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
98. Discuss the characteristics of short-term government securities in relation to a

government's liquidity position.
The matching principle applies to any shortfall in short-term liquidity requirements

that arise out of within-year timing mismatches between a government's revenues
and expenditure cash flows. In the case of the Australian government, short-term
securities called short-term T-notes are issued. Up till recently the strong cash
position of the Commonwealth government has not seen any issue of T-notes since
2003. It is possible at some future date when the economy slows that the issue of
T-notes may resume.
Bloom's: Knowledge
99. Discuss the role and features of secondary market transactions for Treasury bonds.
Treasury bonds can be bought and sold as on-exchange transactions or over-the-

counter transactions. In Australia treasury bonds are listed on the ASX but the
volume of trades is traditionally low compared with the volume of over-the-counter
transactions. When they are traded they are quoted in terms of their redemption
yield or yield to maturity.

100. Discuss the current features of how Australian state governments manage their
borrowings.
Each Australian state has formed a central borrowing authority to undertake

borrowings on behalf of the state government and its instrumentalities. States
require funds for a variety of services such as roads and hospitals. Some of the
advantages of a central borrowing authority are economies of scale, timing of
issues, reduced potential for competition between states, more effective tender and
dealer panels and potentially larger size of debt issue.
101. Discuss what factors influence financial system liquidity in Australia.
Three major factors affect financial system liquidity. They are Commonwealth
Government budget surpluses, official foreign exchange transactions, and net sales
of government bonds (CGS) and repurchase agreements. Taxation receipts, budget
recurrent and capital expenditures and interest and payments on T-notes and
Treasury bonds all influence the daily cash position. The Reserve Bank of
Australia can enter the FX market to conduct transactions on behalf of the
Commonwealth Government or occasionally support the value of the AUD. When
the government buys overseas goods the RBA arranges purchase of the FX
currency to do so and, in the process, creates an increase of liquidity in the
financial system. To offset this, the central bank will neutralise its FX transactions
through its market operations.
102. Discuss how the Australian financial system manages settlement risk for its market
participants.
The clearing of value payments system transactions in Australia is coordinated by

the Australian Payments Clearing Association (APCA). APCA is a limited liability
company formed by banks, building societies, credit unions and the Reserve Bank.
It manages clearing for cheques, direct entry payments, ATM and debit card
transactions and high-value payments. The adoption of real-time gross settlement
(RTGS) also lessens settlement risk. Banks and other authorised providers of
payments services maintain a special account with the Reserve Bank of Australia
to facilitate settlement.
Chapter 13
1. All of the following will generally make a central bank increase interest rates,
except:
A. excessive credit
growth.
B. increasing surplus balance of

payments.
C. large changes in price

levels.
D. heavy downward pressure in the foreign exchange.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 13.1 Describe the macroeconomic context of interest rate determination, in particular the liquidity effect, the income
effect and the inflation effect on interest rates.
Section: 13.1 The macroeconomic context of interest rate determination

2. If a country's balance of payments is constantly in a large deficit, a central bank
will generally:
A. lower interest rates.
B. buy government securities

regularly.
C. increase interest rates.
D. encourage looser monetary

policy.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

3. If credit growth and associated debt levels are growing too quickly, a central bank
will generally:
A. decease interest
rates.
B. use open market operations and sell government securities.
D. loosen monetary
policy.
Difficulty: Medium
Est time: <1 minute

4. If a central bank increases interest rates, then gradually:
A. the country's gross domestic product is likely to increase.
B. foreign exchange rate is likely to come under downward

pressure.
C. demand for imported goods and services is likely to decrease.
D. flows of investment funds into the country are likely to

decrease.
Difficulty: Medium
Est time: <1 minute
5. If a central bank decreases interest rates, then gradually:
A. the country's gross domestic product is likely to decrease.

B. foreign exchange rate is likely to appreciate.
C. demand for exported goods and services is likely to

increase.

decrease.
Difficulty: Medium
Est time: <1 minute
6. If a central bank sells government securities as part of implementing monetary

policy:
A. the liquidity in the financial system will

increase.
B. interest rates are likely to

increase.
C. spending in the economy is likely to

increase.
D. the price of the currency is likely to depreciate.
Difficulty: Medium
Est time: <1 minute
7. A lower level of income in all sectors of the economy causes the demand for funds
to _______ and the interest rate to _____.
A. increase; rise
B. decrease; fall
C. increase;
fall
D. decrease; rise
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. A higher level of income in all sectors of the economy causes the demand for funds
A. increase; rise
B. decrease; fall
C. increase;
fall
D. decrease; rise
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. An increase in the prices of goods and services causes the demand for funds to
_____ and market interest rates should _______.
A. fall;
increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. A decrease in the prices of goods and services causes the demand for funds to
A. fall;
increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When a change in monetary policy is implemented, the initial effect on interest
rates is generally the:
A. income
effect.
B. liquidity
effect.
C. expected inflation
effect.
D. wealth
effect.
Difficulty: Easy
Est time: <1 minute
12. When interest rates increase and normal cash holdings are decreased and invested
in securities, this is called:
A. consumption.
B. dishoarding.
C. reinvestment.
D. disintermediation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The Reserve Bank increases interest rates to reduce the level of spending in the
economy. As the rate of growth in economic activity slows, the demand for funds
also slows. This impact of a change in interest rates is described as the:
A. inflation
effect.
B. liquidity
effect.
C. income
effect.
D. monetary effect.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

14. In relation to economic indicators, a leading indicator is:
A. one that provides same-time tracking of the level of economic

activity.
B. one that measures from peak to peak of the business

cycle.
C. an indicator such as unemployment

data.
D. one that changes before changes in the business cycle.
Difficulty: Medium
Est time: <1 minute

15. In relation to economic indicators, a lagging indicator is:
A. an indicator that provides same-time tracking of the level of economic

activity.
B. an indicator that changes after a change in the business

cycle.
C. an indicator that measures from peak to peak of the business

cycle.
D. an indicator that changes before changes in the business

cycle.
Difficulty: Medium
Est time: <1 minute

16. Consider the following graphs:
Which of the following types of economic indicators do the above graphs depict?
A. Coincident
indicator
B. Leading
indicator
C. Price-index indicator
D. Lagging
indicator
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

17. An economic indicator that tends to follow changes in the business cycle is a:
A. coincident
indicator.
B. lagging
indicator.
C. leading
indicator.
D. secondary
indicator.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

18. According to the loanable funds approach to interest rate determination, the
demand curve slopes downward because:
A. when interest rates are low, inflation is

low.
B. the lower the interest rates, the greater the demand for
funds.
C. the higher the interest rates, the greater the demand for funds.
D. the lower the interest rates, the smaller the demand for funds.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 13.2 Explain the loanable funds approach to interest rate determination, including demand and supply variables for
loanable funds, equilibrium and the effect of changes in variables on interest rates.
Section: 13.2 The loanable funds approach to interest rate determination

19. According to the loanable funds approach to interest rate determination, the supply
curve slopes up because:
A. the lower the interest rates, the more loanable funds will be
supplied.
B. higher interest rates reduce the inflation rate.
C. a rise in interest rates makes lenders more willing to supply

funds.
D. when bond prices are high, more loanable funds will be

supplied.
Difficulty: Easy
Est time: <1 minute

20. In the loanable funds approach to interest rate determination, if the business sector
_____ its demand for funds, then the demand curve would shift to the _____:
A. increase; to the
left
B. increase; to the
right
C. decrease; to the right
D. decrease; up
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

21. The term ‘loanable funds' refers to:
A. only those funds loaned to banks by the central

bank.
B. only those funds loaned by one bank to another

bank.
C. only those funds loaned to banks by the public.
D all those funds changing hands between the lenders and

. borrowers in the financial markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

22. Which of the following determine(s) the level of interest rates?
i. The supply of savings by households and businesses
ii. The demand for investment funds
iii. The government's net supply of and/or demand for funds
A. i only
B. ii
only
C. i and ii only
D. i, ii and iii
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

23. Under the loanable funds approach to explaining and forecasting interest rates, the
concept of dishoarding is introduced. Which of the following statements regarding
dishoarding is correct?
A. Dishoarding will occur as interest rates

rise.
B. Dishoarding will occur as interest rates

fall.
C. Dishoarding will change the slope of the demand curve.
D. Dishoarding is caused by government budget

deficits.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

24. Which of the following would cause the quantity of loanable funds supplied to
increase?
A. A decrease in inflationary
pressures
B. An increase in inflationary pressures
C. An increase in interest rates
D. A decline in interest
rates
Difficulty: Medium
Est time: <1 minute

25. All other things being equal, a decrease in the demand for loanable funds:
A. drives the interest rate up.
B. drives the interest rate

down.
C results from an increase in business circumstances and a decrease

. in the level of savings.
D. might not have any effect on the interest

rate.
Difficulty: Medium
Est time: <1 minute

26. All else being equal, the demand curve for loanable funds may shift to the right
(increase) as a result of:
A. a fall in the supply of loanable

funds.
B. expectations of a forthcoming
recession.
C. technological improvements.
D. a fall in business prospects.
Difficulty: Medium
Est time: <1 minute

27. All else being equal, the demand curve for loanable funds may shift to the left
(decrease) as a result of:
A. an increase in the supply of loanable

funds.
B. expectations of forthcoming economic growth.
C. an increase in the risk of bonds relative to other assets.
D. an improvement in business prospects.
Difficulty: Medium
Est time: <1 minute

28. All else being equal, the supply curve for loanable funds may shift to the left
A. government
borrowing.
B. expectations of an increase in
inflation.
C. businesses borrowing to finance profitable

investments.
D. an increase in corporate
taxes.
Difficulty: Medium
Est time: <1 minute

29. Interest rates will fall when the demand curve for loanable funds:
A. shifts up.
B. shifts to the right.
C. is affected by poor growth prospects in the

economy.
D. shifts
sideways.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

30. All else being equal, if a central bank buys government bonds from the market it
would:
A. increase the money

supply.
B. increase interest rates.
C. mean savings in the economy are likely to

increase.
D. mean the supply of loanable funds would move to the left.
Difficulty: Easy
Est time: <1 minute

31. All else being equal, if a central bank sells government bonds from the market it
would:
A. decrease interest
rates.
B. decrease the money

supply.
C. most likely decrease savings in the

economy.
D. mean the supply of loanable funds would move to the right.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

32. Consider the following graph:
Using the loanable funds approach to interest rate determination, what does the
curve in the above graph represent?
A. Household sector supply of loanable

funds
B. Business sector demand for loanable

funds
C. Overseas sector and household sector supply of loanable funds
D. Government sector and business sector demand for loanable

funds
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

33. If there is an excess demand for loanable funds at a given interest rate:
A. bond prices will increase.
B. bond prices will

decrease.
C. the interest rate will rise.
D. bond prices may rise or fall, depending on the cause for

excess funds.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
34. If there is an excess supply of loanable funds at a given interest rate:

B. bond prices will
decrease.

excess funds.
Difficulty: Medium
Est time: <1 minute
35. If the equilibrium interest rate in the market is estimated to be 6%, which of the
following is likely to occur if rates increase to 7%?
A. The supply of funds shifts to the

right.
B. The total supply of lending shifts to the

right.
C. The quantity of funds supplied is greater than the quantity of

funds demanded.
D The quantity of funds demanded is greater than the quantity
. of funds supplied.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
36. During a period of economic expansion, when expected profitability is high, the:
A. equilibrium price of bonds increases.
B. equilibrium interest rate

falls.
C. supply curve for bonds shifts to the

left.
D. demand curve for loanable funds shifts to the
right.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
37. If inflation is expected to increase, this may cause:
A. interest rates to rise.
B. the demand for loanable funds to

fall.
C. the supply of loanable funds to

increase.
D. interest rates to
fall.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. It is argued that one of the weaknesses of the loanable funds approach is that a final
equilibrium interest rate cannot be determined. Which of the following statements
supports this argument?
A. An equilibrium interest rate will affect savings at that level, which will
affect the loanable funds demand curve.
B. Dishoarding of loanable funds will continue for successive

periods.
C In the loanable funds approach, the supply and demand curves are
. interdependent.
D Changes in the money supply in one period need to be
. matched in ensuing periods.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
39. The term structure of interest rates is generally defined with respect to yields on
which securities?
A. Commercial paper
B. Corporate
bonds
C. Government
securities
D. State
securities
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 13.3 Understand yields and the shape of various yield curves within the context of the term structure of interest
rates, and apply the expectations theory, the segmented markets theory and the liquidity premium theory.
Section: 13.3 The term structure of interest rates
40. The expression ‘term structure of interest rates':
A. reflects the differing tax treatment received by different

securities.
B. represents the variation in yields for similar instruments differing in

maturity.
C. always results in an upward-sloping yield curve.

D. generally results in a downward-sloping yield
curve.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
41. The _______ show the term structure of interest rates as a graph.
A. risk-return
curves
B. yield curves
C. supply and demand

curves
D. total demand curves

AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
42. If the yields on short-term securities are lower than comparable long-term
securities, the yield curve will be:
A. level
.
B. negative
.
C. positive.
D. undefined.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. If the yields on short-term securities are higher than comparable long-term
A. level
.
B. negative
.
C. positive.
D. undefined.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

44. When a yield curve has a negative slope:
A. long-term yields are higher than short-term

yields.
B. short-term yields are higher than long-term

yields.
C. the money market is expecting default by issuers of bank

bills.
D. the inflation rate is expected to rise.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

45. The following monthly data of yields on five-year Treasury bonds comes from the
Reserve Bank Bulletin:
20xx/xx Jul. 7.65% Jan. 7.30%
Aug. 7.75% Feb. 7.15%
Sep. 7.80% Mar. 6.91%
Oct. 7.90% Apr. 6.80%
Nov. 7.75% May 6.65%
Dec. 7.50% Jun. 6.55%
What type of yield curve is indicated by the above data set?
A. Normal yield
curve
B. Inverse yield curve

C. Humped yield curve
D. Variable yield
curve
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

46. When a yield curve has a positive slope:

yields.

yields.
C. the bond market is expecting default by bond issuers.
D. the inflation rate is expected to

fall.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

47. If the yields on short-term securities are the same as those for comparable long-
term securities, the yield curve will have a/an:
A. constant
slope.
B. negative slope.
C. positive
slope.
D. undefined slope.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

48. A yield curve where the market participants expect higher future rates of interest is:
A. downward-sloping.
B. upward-
sloping.
C. flat
.
D. inverse
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

49. A yield curve where market participants expect lower future rates of interest is:
B. upward-
sloping.
C. flat
.
D. linear
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

50. Using the expectations theory of term structure, a negatively sloped yield curve
indicates that investors expect:
A. falling long-term interest

rates.
B. rising long-term interest rates.
C. falling short-term interest rates.
D. rising short-term interest

rates.
Difficulty: Medium
Est time: <1 minute

51. Using the expectations theory of term structure, a positively sloped yield curve

rates.
C. short-term interest rates to be lower in the near future.
D. short-term interest rates to be higher in the near

future.
Difficulty: Medium
Est time: <1 minute

52. Which of the following is NOT a hypothesis or theory used to explain the general
shape of the yield curve?
A. Expectations
hypothesis
B. Liquidity premium hypothesis
C. Market segmentation
theory
D. Capital markets theory
Difficulty: Medium
Est time: <1 minute

53. The yield curve theory that hypothesises that investors prefer short-term securities
because of the risk associated with longer term securities is the:
A. expectations
hypothesis.
B. liquidity premium
hypothesis.
C. market segmentation
theory.
D. capital markets
theory.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

54. Because long-term securities face greater risk of capital loss than do short-term
securities, investors generally:
A. pay a higher price for long-term

securities.
B. require a higher yield on long-term securities.
C. require a lower yield on long-term

securities.
D. stay away from long-term

securities.
Difficulty: Medium
Est time: <1 minute

55. In an economic period of high inflation, the yield curve would most likely be:
A. upward-
sloping.
B. downward-sloping.
C. flat
.
D. more
curved.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

56. The yield curve most frequently observed over the years is:
A. positively sloped.
B. negatively
sloped.
C. flat
.
D. hump-
backed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

57. The idea that a normal yield curve is most frequently observed can be explained by
the __________ theory/theories.
A. expectations
B. segmente
d
C. expectations and liquidity

premium
D. segmented and liquidity premium
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

58. At any time, the shape and slope of the yield curve is affected by:
A. the demand and supply conditions in the various segments of the market.
B. inflationary expectations.
C. liquidity preferences.
D. All of the given choices.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

59. In relation to the term structure of interest rates, the expectations theory assumes:
A. there are a large number of financial investors who hold heterogeneous

expectations about future interest rates.
B. investors need to take into account costly transactions as they change

their expectations.
C long-term rates paid bonds will be equal to the average of short-

. term interest rates expected to prevail over the longer term period.
D. there is some impediment to market rates moving to

equilibrium.
Difficulty: Medium
Est time: <1 minute

60. The expectations theory of term structure suggests that the:
A. yield curve should be upward-sloping.
B. yield curve should be downward-

sloping.
C shape of the yield curve reflects the risk premium incorporated

. into the yields on long-term bonds.
D shape of the yield curve depends on the expected future path

. of short-term interest rates.
Difficulty: Easy
Est time: <1 minute

61. According to the expectations theory of term structure, if market participants
expect future short-term rates to be higher than current short-term rates, the yield
curve will:
A. be upward-sloping.
B. be downward-
sloping.
C. be
flat.
D slope upward or downward or be flat, depending on risk and

. liquidity considerations.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

62. According to the expectations theory of term structure, if next year's short-term
interest rate is expected to be higher than the current short-term rate, the:
A. current short-term rate will be equal to the current long-term rate.
B. current short-term rate will be higher than the current long-term

rate.
C. current short-term rate will be lower than the current long-term

rate.
D. yield curve will be downward-sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

interest rate is expected to be lower than the current short-term rate, the:

rate.

rate.
D. yield curve will be upward-sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

64. According to the expectations theory of term structure, if investors believed that
the average of the expected future short-term yields was greater than the long-term
yield for a holding period, they would act so as to:
A. drive down the price of the short-term security and drive up the price of
the long-term security.
B. drive up the price of the short-term security and drive down the price
of the long-term security.
C. drive up the prices of both the short-term and long-term

securities.
D. drive down the prices of both the short-term and long-term

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

65. The implication of the expectations theory that expected returns for a holding
period must be the same for bonds of different maturities depends on the
assumption that:
A. yield curves normally slope downward.
B. yield curves normally slope

upward.
C. instruments with different terms to maturity are perfect

substitutes.
D. lenders are generally risk-

averse.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

66. The segmented markets theory rejects two of the assumptions of the expectations
theory, namely:
A. there are a large number of financial investors who hold homogeneous

expectations about future interest rates and no impediments to market
rates moving to equilibrium.
B. there are no transactions costs and investors hold homogeneous

expectations.
C that investors are indifferent between short-term or long-term

. bonds and that all bonds are perfect substitutes.
D there is no impediment to market rates moving to equilibrium

. and the goal of investors is to maximise their expected rate of
return.
Difficulty: Medium
Est time: <1 minute

67. Using the pure expectations approach to the determination of interest rates, what is
the shape of the yield curve indicated in the following data?
(0i1) 9.47% per annum
A. Humped yield curve
C. Normal yield
curve
D. Variable yield
curve
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

68. The segmented markets theory of term structure:
A. explains upward-sloping yield curves as a result of the demand for long-

term bonds being high, relative to the demand for short-term bonds.
B. explains upward-sloping yield curves as a result of the demand for

long-term bonds being low, relative to the demand for short-term
bonds.
C explains upward-sloping yield curves as a result of the favourable

. tax treatment of long-term bonds.
D. is unable to explain upward-sloping yield

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

69. Which of the following statements about segmented markets theory of term
structure is correct?
A. It assumes that lenders always lend for short

periods.
B. It assumes that borrowers have particular periods for which they want
to borrow.
C. It gives a good explanation of why yield curves usually slope

upward.
D. It assumes that all bonds are perfect substitutes for each

other.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

A. has difficulty explaining why yield curves are usually upward-sloping.
B. has difficulty explaining why yield curves are usually downward-

sloping.
C ignores the existence of market participants who seek to take

. advantage of price differences.
D provides a good explanation of why yields on bonds of

. varying maturities tend to move together.
Difficulty: Medium
Est time: <1 minute

71. The segmented markets theory for explaining the term structure of interest rates
assumes that:
A. bond prices and yields are positively related.
B. the yield curve is upward-

sloping.
C. the yield curve is

flat.
D. securities in different maturity ranges are not alternatives for

one another.
Difficulty: Medium
Est time: <1 minute

72. The assumption that prices for short-term and long-term securities are determined
in the different maturity ranges is the basis for the _____ approach to explaining
the term structure.
A. liquidity premium
B. expectations
C. segmented
markets
D. yield curve
Difficulty: Easy
Est time: <1 minute

73. What is the most important contrast between the expectations theory and the
segmented markets theory?
A. The segmented markets theory states that investors view similar

instruments that differ only with respect to maturity as perfect substitutes.
B. The expectations theory states that investors view similar instruments

that differ only with respect to maturity as perfect substitutes.
C The expectations theory does a better job of explaining why yield

. curves are usually upward-sloping.
D The segmented markets theory does a better job of explaining

. why the yields on bonds of different maturities tend to move
together.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

74. To compensate for the uncertainty of future interest rates and the greater default
risk for longer term loans, the lender generally:
A. charges a higher rate of interest on long-term

loans.
B. includes a very high number of restrictive debt provisions.
C. is entitled to change the terms of the loan at any

time.
D. is entitled to demand repayment of the loan at any time.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

75. The liquidity premium theory of the term structure assumes:
A. that interest rates on long-term bonds respond to supply and demand

conditions for those bonds.
B. investors have a preference for short-term bonds, as they have lower

interest-rate risk.
C that an average of expected short-term rates is an important

. component of interest rates on long-term bonds.
Difficulty: Medium
Est time: <1 minute

76. The liquidity premium theory of the term structure proposes:
A. it is the relative supply and demand of securities in the various maturity

ranges that determines yields.
B. investors have a preference for short-term bonds, as they have greater

liquidity.
C. longer-term bonds have less default

risk.
D. longer-term bonds are less volatile in

price.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

77. Support for the addition of a liquidity premium to the expectations theory is
derived from:
A. the slope of the observed normal yield curve is steeper than that of
expectation theory.
B. the slope of the observed normal yield curve is flatter than that of
expectation theory.
C. the liquidity premium decreases over time.
D in times of tight monetary policy an inverse yield curve

. becomes more inverse.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

78. If the yield curve is observed to be flat, according to the liquidity premium theory,
this indicates that the market is predicting:
A. a small rise in short-term rates in the near future and a small decline
further out in the future.
B. constant short-term interest rates in the near future, and further out in
the future.
C a small decline in short-term interest rates in the near future,

. continuing to decline slowly further out in the future.
D constant short-term interest rates in the near future and a small

. decline further out in the future.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

79. The risk structure of interest rates refers to the:
A. amount of extra interest necessary to compensate investors for the greater

default risk of some bonds.
B. relationship among the interest rates on bonds with the same

maturity.
C. relationship among the interest rates on similar bonds with

different maturities.
D amount of extra interest needed to compensate investors for

. the lesser liquidity of some bonds.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 13.4 Explain the risk structure of interest rates and the risk-free rate, and explore the effects of default risk on
interest rates.
Section: 13.4 The risk structure of interest rates

80. Generally, an increase in default risk will result in a/an _______ required return or
interest rate.
A. lowe
r
B. higher
C. unaltered
D. undetermined
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

81. Represented below are yield curves for the following securities:
i. Bank-accepted bills
ii. Treasury notes
iii. Promissory notes
iv. Negotiable certificates of deposit
Based on your understanding of the risk structure of interest rates, rank the
securities in order from curve A to curve D.
A. i, ii, iv,
iii
B. ii, i, iv,
iii
C. ii, iv, i,
iii
D. iv, ii, iii,

i
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
interest rates.
82. As a factor explaining yield differences between Australian Treasury bonds,

default risk is:
A. important, but other factors such as market risk are more

crucial.
B. always an important
factor.
C. rarely important.
D. never an issue.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.
83. In relation to the risk structure of interest rates:
A. the yield on a BBB rated bonds is higher than an AA-rated

bond.
B. the risk premium of borrowers may vary over

time.
C. the government bonds are assumed to be the benchmark rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

84. For debt instruments, if interest rates increase:
A. prices of long-term bonds will increase more than short-term

bonds.
B. prices of short-term bonds will increase more than long-term

bonds.
C. the coupons of long-term bonds will increase more than short-

term bonds.
D. coupons of long-term bonds will increase more than short-

term bonds.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
interest rates.

85. Unsecured notes are generally:
A. more risky than debentures.
B. less risky than Treasury

bonds.
C. less risky than Treasury

notes.
D. less risky than commercial

paper.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

86. During periods of economic recession, it is probable that the risk premium gaps for
different corporate borrowers will:
A. decrease
.
B. increase
.
D. widen
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

87. Using the pure expectations approach to the determination of interest rates,
calculate the expected (E) rate of interest of a one-year investment that will be
available in 12 months' time (1i1), given the following data:
Current rate of return on a one-year-to-maturity (0i1) instrument: 7.75% per annum
Current rate of return on a two-year maturity (0i2) instrument: 8.25% per annum
A. 7.75% per
annum
B. 8.25% per
annum
C. 8.75% per
annum
D. 9.25% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
interest rates.
Learning Objective: 13.5 Apply calculations used to forecast interest rates based on teh assumption of the experctation theory.

calculate the expected (E) rate of interest of a two-year investment that will be
available in 12 months’ time (1i3), given the following data:
Current rate of return on a three-year maturity (0i3) instrument: 8.65% per annum
A. 8.35% per
annum
B. 9.10% per
annum
C. 9.56% per
annum
D. 19.03% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
interest rates.

89. If investors are not indifferent to whether they hold long-term or short-term
securities, and need a liquidity premium to hold longer term securities, an investor
who needs a liquidity premium of 0.25% per annum will expect to receive _______
on a two-year investment, given the following data:
8.55% per annum

(E1i1)
A. 8.51% per
annum
B. 8.63% per
annum
C. 8.80% per
annum
D. 8.88% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
interest rates.
90. If the current account of the balance of payments of a country is significantly in

deficit, the central bank will generally lower interest rates in order to help
borrowers with their interest rate costs.
FALSE
A central bank will generally increase interest rates if the current account is
significantly in deficit.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
91. Unfortunately, economic indicators don't provide clear and unambiguous messages
about the future direction of economic activity and growth.
TRUE
Often releases of new data or information present conflicting indications.

Difficulty: Medium
Est time: <1 minute
92. The liquidity effect of expansionary monetary policy is likely to see interest rates
fall in the first place but as the pace of economic activity increases the income
effect is likely to result in a rise in the interest rates in the market.
TRUE
Money market operations such as direct buying of government securities affect the
money supply and level of liquidity in the financial system.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

93. According to the loanable funds approach, the supply of loanable funds is derived
from the government sector and the business sector.
FALSE
Supply is from the household sector, changes in money supply and dishoarding.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
94. An increase in interest rates is likely to result in a permanent, higher level of

hoarding.
FALSE
An increase in interest rates is likely to result in a higher level of dishoarding.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
95. The term structure of interest rates describes how interest rates move over time.
FALSE
It is the relationship between interest rates and term to maturity for debt
instruments in the same risk class.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. When yield curves are downward-sloping, long-term interest rates are above short-
term interest rates.
FALSE
When yield curves are downward-sloping, short-term interest rates are above long-
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. According to expectations theory of term structure, a normal curve will result from
expectations that future short-term rates will be higher than current short-term
rates.
TRUE
According to this theory since the market believes that future short-term rates will
be higher than current short-term rates, the yield curve will be upward-sloping.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

98. According to the liquidity premium theory of term structure, a mildly upward-
sloping yield curve suggests the market is predicting constant short-term interest
rates.
TRUE
A liquidity premium is suggested to change the slope so that if the market is

predicting little change, once liquidity premium is added, the slope appears mildly
upward-sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
99. The risk structure of interest rates describes the relationship between interest rates
of different bonds with the same maturity.
TRUE
Securities issued by different borrowers will have different levels of risk such as
default risk. The yields offered by them will differ in their margin above the risk-
free rate of government bonds.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
interest rates.
100. Discuss when a central bank will generally increase interest rates.
After forming economic variables such as balance of payments and a view on the
desired level of economic activity and employment, a central bank will generally
increase interest rates for some of the following: if the rate of inflation over the
business cycle is outside its target range; if the rate of growth in gross domestic
product is too high; if the current account of the balance of payments is
significantly in deficit; if credit growth and associated debt levels are growing too
rapidly; or if the currency is under excessive downward pressure in the foreign
exchange markets.
Bloom's: Synthesis

101. Discuss the difficulties a central bank faces in trying to forecast how liquidity,
income and inflation effects in relation to interest rates will be affected by interest
rate changes.
One of the problems is that often releases of new information or data on the state of
the economy present conflicting indications, with some data indicating a slowdown
while other data suggesting that the economy is still growing. With different
sectors of the economy often experiencing different growth patterns, the problem is
compounded.
102. Define and discuss briefly the three common types of economic indicators.
Economic indicators are often divided into: leading indicators that change before
changes in the trend in the level of economic activity, coincident indicators that
provide same-time tracking of the level of economic activity and lagging indicators
that change after a change in the business cycle. However, as no single indicator is
constantly in one category, numerous indicators are analysed by market
participants.
Bloom's: Knowledge
103. In the context of the loanable funds theory, discuss the sectors that have a demand
for funds in relation to demand and supply curves.
The two sectors of the overall economy that demand funds are the businesses that
demand funds for short-term working capital and for longer-term investment. The
second sector is the government that demands funds for intra-year liquidity and for
the case of a budget deficit.
Bloom's: Knowledge

104. In the context of the loanable funds theory, discuss the sectors that supply funds in
relation to demand and supply curves.
Sources of funds are the savings of the household sector that are relatively
insensitive to increases in interest rates, changes in the money supply through
actions of a central bank and the proportion of total savings in an economy held as
currency that changes with interest rates. For example, when interest rates increase
there is the incentive to buy more securities to obtain the increased yields, so
decreasing the amount of currency holdings.
1. All of the following will generally make a central bank increase interest rates,
except:
A. excessive credit
growth.
B. increasing surplus balance of

payments.
C. large changes in price

levels.
D. heavy downward pressure in the foreign exchange.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
2. If a country's balance of payments is constantly in a large deficit, a central bank

will generally:
A. lower interest rates.
B. buy government securities

regularly.
D. encourage looser monetary

policy.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
3. If credit growth and associated debt levels are growing too quickly, a central bank
will generally:
A. decease interest
rates.
B. use open market operations and sell government securities.
D. loosen monetary
policy.
Difficulty: Medium
Est time: <1 minute

4. If a central bank increases interest rates, then gradually:
A. the country's gross domestic product is likely to increase.
B. foreign exchange rate is likely to come under downward

pressure.
C. demand for imported goods and services is likely to decrease.

decrease.
Difficulty: Medium
Est time: <1 minute
5. If a central bank decreases interest rates, then gradually:
A. the country's gross domestic product is likely to decrease.

B. foreign exchange rate is likely to appreciate.
C. demand for exported goods and services is likely to

increase.

decrease.
Difficulty: Medium
Est time: <1 minute
6. If a central bank sells government securities as part of implementing monetary

policy:
A. the liquidity in the financial system will

increase.
B. interest rates are likely to

increase.
C. spending in the economy is likely to

increase.
D. the price of the currency is likely to depreciate.
Difficulty: Medium
Est time: <1 minute
7. A lower level of income in all sectors of the economy causes the demand for funds
A. increase; rise
B. decrease; fall
C. increase;
fall
D. decrease; rise
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. A higher level of income in all sectors of the economy causes the demand for funds
A. increase; rise
B. decrease; fall
C. increase;
fall
D. decrease; rise
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. An increase in the prices of goods and services causes the demand for funds to
A. fall;
increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. A decrease in the prices of goods and services causes the demand for funds to
A. fall;
increase
B. fall; decrease
C. rise; increase
D. rise; decrease
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. When a change in monetary policy is implemented, the initial effect on interest
rates is generally the:
A. income
effect.
B. liquidity
effect.
C. expected inflation
effect.
D. wealth
effect.
Difficulty: Easy
Est time: <1 minute
12. When interest rates increase and normal cash holdings are decreased and invested
in securities, this is called:
A. consumption.
B. dishoarding.
C. reinvestment.
D. disintermediation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The Reserve Bank increases interest rates to reduce the level of spending in the
economy. As the rate of growth in economic activity slows, the demand for funds
also slows. This impact of a change in interest rates is described as the:
A. inflation
effect.
B. liquidity
effect.
C. income
effect.
D. monetary effect.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

14. In relation to economic indicators, a leading indicator is:
A. one that provides same-time tracking of the level of economic

activity.
B. one that measures from peak to peak of the business

cycle.
C. an indicator such as unemployment

data.
D. one that changes before changes in the business cycle.
Difficulty: Medium
Est time: <1 minute

15. In relation to economic indicators, a lagging indicator is:
A. an indicator that provides same-time tracking of the level of economic

activity.
B. an indicator that changes after a change in the business

cycle.
C. an indicator that measures from peak to peak of the business

cycle.
D. an indicator that changes before changes in the business

cycle.
Difficulty: Medium
Est time: <1 minute

16. Consider the following graphs:
Which of the following types of economic indicators do the above graphs depict?
A. Coincident
indicator
B. Leading
indicator
C. Price-index indicator
D. Lagging
indicator
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

17. An economic indicator that tends to follow changes in the business cycle is a:
A. coincident
indicator.
B. lagging
indicator.
C. leading
indicator.
D. secondary
indicator.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

18. According to the loanable funds approach to interest rate determination, the
demand curve slopes downward because:
A. when interest rates are low, inflation is

low.
B. the lower the interest rates, the greater the demand for
funds.
C. the higher the interest rates, the greater the demand for funds.
D. the lower the interest rates, the smaller the demand for funds.
Difficulty: Medium
Est time: <1 minute

19. According to the loanable funds approach to interest rate determination, the supply
curve slopes up because:
A. the lower the interest rates, the more loanable funds will be
supplied.
B. higher interest rates reduce the inflation rate.
C. a rise in interest rates makes lenders more willing to supply

funds.
D. when bond prices are high, more loanable funds will be

supplied.
Difficulty: Easy
Est time: <1 minute

20. In the loanable funds approach to interest rate determination, if the business sector
_____ its demand for funds, then the demand curve would shift to the _____:
A. increase; to the
left
B. increase; to the
right
C. decrease; to the right
D. decrease; up
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

21. The term ‘loanable funds' refers to:
A. only those funds loaned to banks by the central

bank.
B. only those funds loaned by one bank to another

bank.
C. only those funds loaned to banks by the public.
D all those funds changing hands between the lenders and

. borrowers in the financial markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

22. Which of the following determine(s) the level of interest rates?
i. The supply of savings by households and businesses
ii. The demand for investment funds
iii. The government's net supply of and/or demand for funds
A. i only
B. ii
only
C. i and ii only
D. i, ii and iii
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

23. Under the loanable funds approach to explaining and forecasting interest rates, the
concept of dishoarding is introduced. Which of the following statements regarding
dishoarding is correct?
A. Dishoarding will occur as interest rates

rise.
B. Dishoarding will occur as interest rates

fall.
C. Dishoarding will change the slope of the demand curve.
D. Dishoarding is caused by government budget

deficits.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

24. Which of the following would cause the quantity of loanable funds supplied to
increase?
A. A decrease in inflationary
pressures
B. An increase in inflationary pressures
C. An increase in interest rates
D. A decline in interest
rates
Difficulty: Medium
Est time: <1 minute

25. All other things being equal, a decrease in the demand for loanable funds:
A. drives the interest rate up.
B. drives the interest rate

down.
C results from an increase in business circumstances and a decrease

. in the level of savings.
D. might not have any effect on the interest

rate.
Difficulty: Medium
Est time: <1 minute

26. All else being equal, the demand curve for loanable funds may shift to the right
(increase) as a result of:
A. a fall in the supply of loanable

funds.
B. expectations of a forthcoming
recession.
C. technological improvements.
D. a fall in business prospects.
Difficulty: Medium
Est time: <1 minute

27. All else being equal, the demand curve for loanable funds may shift to the left
A. an increase in the supply of loanable

funds.
B. expectations of forthcoming economic growth.
C. an increase in the risk of bonds relative to other assets.
D. an improvement in business prospects.
Difficulty: Medium
Est time: <1 minute

28. All else being equal, the supply curve for loanable funds may shift to the left
A. government
borrowing.
B. expectations of an increase in
inflation.
C. businesses borrowing to finance profitable

investments.
D. an increase in corporate
taxes.
Difficulty: Medium
Est time: <1 minute

29. Interest rates will fall when the demand curve for loanable funds:
A. shifts up.
B. shifts to the right.
C. is affected by poor growth prospects in the

economy.
D. shifts
sideways.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

30. All else being equal, if a central bank buys government bonds from the market it
would:
A. increase the money

supply.
B. increase interest rates.
C. mean savings in the economy are likely to

increase.
D. mean the supply of loanable funds would move to the left.
Difficulty: Easy
Est time: <1 minute

31. All else being equal, if a central bank sells government bonds from the market it
would:
A. decrease interest
rates.
B. decrease the money

supply.
C. most likely decrease savings in the

economy.
D. mean the supply of loanable funds would move to the right.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

32. Consider the following graph:
Using the loanable funds approach to interest rate determination, what does the
curve in the above graph represent?
A. Household sector supply of loanable

funds
B. Business sector demand for loanable

funds
C. Overseas sector and household sector supply of loanable funds
D. Government sector and business sector demand for loanable

funds
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

33. If there is an excess demand for loanable funds at a given interest rate:
B. bond prices will

decrease.

excess funds.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
34. If there is an excess supply of loanable funds at a given interest rate:

B. bond prices will
decrease.

excess funds.
Difficulty: Medium
Est time: <1 minute
35. If the equilibrium interest rate in the market is estimated to be 6%, which of the
following is likely to occur if rates increase to 7%?
A. The supply of funds shifts to the

right.
B. The total supply of lending shifts to the

right.
C. The quantity of funds supplied is greater than the quantity of

funds demanded.
D The quantity of funds demanded is greater than the quantity
. of funds supplied.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
36. During a period of economic expansion, when expected profitability is high, the:
A. equilibrium price of bonds increases.
B. equilibrium interest rate

falls.
C. supply curve for bonds shifts to the

left.
D. demand curve for loanable funds shifts to the
right.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
37. If inflation is expected to increase, this may cause:
A. interest rates to rise.
B. the demand for loanable funds to

fall.
C. the supply of loanable funds to

increase.
D. interest rates to
fall.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
38. It is argued that one of the weaknesses of the loanable funds approach is that a final
equilibrium interest rate cannot be determined. Which of the following statements
supports this argument?
A. An equilibrium interest rate will affect savings at that level, which will
affect the loanable funds demand curve.
B. Dishoarding of loanable funds will continue for successive

periods.
C In the loanable funds approach, the supply and demand curves are
. interdependent.
D Changes in the money supply in one period need to be
. matched in ensuing periods.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
39. The term structure of interest rates is generally defined with respect to yields on
which securities?
A. Commercial paper
B. Corporate
bonds
C. Government
securities
D. State
securities
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. The expression ‘term structure of interest rates':
A. reflects the differing tax treatment received by different

securities.
B. represents the variation in yields for similar instruments differing in

maturity.
C. always results in an upward-sloping yield curve.

D. generally results in a downward-sloping yield
curve.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
41. The _______ show the term structure of interest rates as a graph.
A. risk-return
curves
B. yield curves
C. supply and demand

curves
D. total demand curves

AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
42. If the yields on short-term securities are lower than comparable long-term
A. level
.
B. negative
.
C. positive.
D. undefined.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
43. If the yields on short-term securities are higher than comparable long-term
A. level
.
B. negative
.
C. positive.
D. undefined.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

44. When a yield curve has a negative slope:

yields.

yields.
C. the money market is expecting default by issuers of bank

bills.
D. the inflation rate is expected to rise.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

45. The following monthly data of yields on five-year Treasury bonds comes from the
Reserve Bank Bulletin:
20xx/xx Jul. 7.65% Jan. 7.30%
Aug. 7.75% Feb. 7.15%
Sep. 7.80% Mar. 6.91%
Oct. 7.90% Apr. 6.80%
Nov. 7.75% May 6.65%
Dec. 7.50% Jun. 6.55%
What type of yield curve is indicated by the above data set?
A. Normal yield
curve

C. Humped yield curve
D. Variable yield
curve
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

46. When a yield curve has a positive slope:

yields.

yields.
C. the bond market is expecting default by bond issuers.
D. the inflation rate is expected to

fall.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

47. If the yields on short-term securities are the same as those for comparable long-
term securities, the yield curve will have a/an:
A. constant
slope.
B. negative slope.
C. positive
slope.
D. undefined slope.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

48. A yield curve where the market participants expect higher future rates of interest is:
B. upward-
sloping.
C. flat
.
D. inverse
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

49. A yield curve where market participants expect lower future rates of interest is:
B. upward-
sloping.
C. flat
.
D. linear
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

50. Using the expectations theory of term structure, a negatively sloped yield curve

rates.
C. falling short-term interest rates.
D. rising short-term interest

rates.
Difficulty: Medium
Est time: <1 minute

51. Using the expectations theory of term structure, a positively sloped yield curve

rates.
C. short-term interest rates to be lower in the near future.
D. short-term interest rates to be higher in the near

future.
Difficulty: Medium
Est time: <1 minute

52. Which of the following is NOT a hypothesis or theory used to explain the general
shape of the yield curve?
A. Expectations
hypothesis
B. Liquidity premium hypothesis
C. Market segmentation
theory
D. Capital markets theory
Difficulty: Medium
Est time: <1 minute

53. The yield curve theory that hypothesises that investors prefer short-term securities
because of the risk associated with longer term securities is the:
A. expectations
hypothesis.
B. liquidity premium
hypothesis.
C. market segmentation
theory.
D. capital markets
theory.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

54. Because long-term securities face greater risk of capital loss than do short-term
securities, investors generally:
A. pay a higher price for long-term

securities.
B. require a higher yield on long-term securities.
C. require a lower yield on long-term

securities.
D. stay away from long-term

securities.
Difficulty: Medium
Est time: <1 minute

55. In an economic period of high inflation, the yield curve would most likely be:
A. upward-
sloping.
B. downward-sloping.
C. flat
.
D. more
curved.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

56. The yield curve most frequently observed over the years is:
A. positively sloped.
B. negatively
sloped.
C. flat
.
D. hump-
backed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

57. The idea that a normal yield curve is most frequently observed can be explained by
the __________ theory/theories.
A. expectations
B. segmente
d
C. expectations and liquidity

premium
D. segmented and liquidity premium
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

58. At any time, the shape and slope of the yield curve is affected by:
A. the demand and supply conditions in the various segments of the market.
B. inflationary expectations.
C. liquidity preferences.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

59. In relation to the term structure of interest rates, the expectations theory assumes:
A. there are a large number of financial investors who hold heterogeneous

expectations about future interest rates.
B. investors need to take into account costly transactions as they change

their expectations.
C long-term rates paid bonds will be equal to the average of short-

. term interest rates expected to prevail over the longer term period.
D. there is some impediment to market rates moving to

equilibrium.
Difficulty: Medium
Est time: <1 minute

60. The expectations theory of term structure suggests that the:
A. yield curve should be upward-sloping.
B. yield curve should be downward-

sloping.
C shape of the yield curve reflects the risk premium incorporated

. into the yields on long-term bonds.
D shape of the yield curve depends on the expected future path

. of short-term interest rates.
Difficulty: Easy
Est time: <1 minute

61. According to the expectations theory of term structure, if market participants
expect future short-term rates to be higher than current short-term rates, the yield
curve will:
A. be upward-sloping.
B. be downward-
sloping.
C. be
flat.
D slope upward or downward or be flat, depending on risk and

. liquidity considerations.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

interest rate is expected to be higher than the current short-term rate, the:

rate.

rate.
D. yield curve will be downward-sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

interest rate is expected to be lower than the current short-term rate, the:

rate.

rate.
D. yield curve will be upward-sloping.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

64. According to the expectations theory of term structure, if investors believed that
the average of the expected future short-term yields was greater than the long-term
yield for a holding period, they would act so as to:
A. drive down the price of the short-term security and drive up the price of
the long-term security.
B. drive up the price of the short-term security and drive down the price
of the long-term security.
C. drive up the prices of both the short-term and long-term

securities.
D. drive down the prices of both the short-term and long-term

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

65. The implication of the expectations theory that expected returns for a holding
period must be the same for bonds of different maturities depends on the
assumption that:
A. yield curves normally slope downward.
B. yield curves normally slope

upward.
C. instruments with different terms to maturity are perfect

substitutes.
D. lenders are generally risk-

averse.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

66. The segmented markets theory rejects two of the assumptions of the expectations
theory, namely:
A. there are a large number of financial investors who hold homogeneous

expectations about future interest rates and no impediments to market
rates moving to equilibrium.
B. there are no transactions costs and investors hold homogeneous

expectations.
C that investors are indifferent between short-term or long-term

. bonds and that all bonds are perfect substitutes.
D there is no impediment to market rates moving to equilibrium

. and the goal of investors is to maximise their expected rate of
return.
Difficulty: Medium
Est time: <1 minute

67. Using the pure expectations approach to the determination of interest rates, what is
the shape of the yield curve indicated in the following data?
A. Humped yield curve
C. Normal yield
curve
D. Variable yield
curve
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

A. explains upward-sloping yield curves as a result of the demand for long-

term bonds being high, relative to the demand for short-term bonds.
B. explains upward-sloping yield curves as a result of the demand for

long-term bonds being low, relative to the demand for short-term
bonds.
C explains upward-sloping yield curves as a result of the favourable

. tax treatment of long-term bonds.
D. is unable to explain upward-sloping yield

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

69. Which of the following statements about segmented markets theory of term
structure is correct?
A. It assumes that lenders always lend for short

periods.
B. It assumes that borrowers have particular periods for which they want
to borrow.
C. It gives a good explanation of why yield curves usually slope

upward.
D. It assumes that all bonds are perfect substitutes for each

other.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

A. has difficulty explaining why yield curves are usually upward-sloping.
B. has difficulty explaining why yield curves are usually downward-

sloping.
C ignores the existence of market participants who seek to take

. advantage of price differences.
D provides a good explanation of why yields on bonds of

. varying maturities tend to move together.
Difficulty: Medium
Est time: <1 minute

71. The segmented markets theory for explaining the term structure of interest rates
assumes that:
A. bond prices and yields are positively related.
B. the yield curve is upward-

sloping.
C. the yield curve is

flat.
D. securities in different maturity ranges are not alternatives for

one another.
Difficulty: Medium
Est time: <1 minute

72. The assumption that prices for short-term and long-term securities are determined
in the different maturity ranges is the basis for the _____ approach to explaining
the term structure.
A. liquidity premium
B. expectations
C. segmented
markets
D. yield curve
Difficulty: Easy
Est time: <1 minute

73. What is the most important contrast between the expectations theory and the
segmented markets theory?
A. The segmented markets theory states that investors view similar

instruments that differ only with respect to maturity as perfect substitutes.
B. The expectations theory states that investors view similar instruments

that differ only with respect to maturity as perfect substitutes.
C The expectations theory does a better job of explaining why yield

. curves are usually upward-sloping.
D The segmented markets theory does a better job of explaining

. why the yields on bonds of different maturities tend to move
together.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

74. To compensate for the uncertainty of future interest rates and the greater default
risk for longer term loans, the lender generally:
A. charges a higher rate of interest on long-term

loans.
B. includes a very high number of restrictive debt provisions.
C. is entitled to change the terms of the loan at any

time.
D. is entitled to demand repayment of the loan at any time.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

75. The liquidity premium theory of the term structure assumes:
A. that interest rates on long-term bonds respond to supply and demand

conditions for those bonds.
B. investors have a preference for short-term bonds, as they have lower

interest-rate risk.
C that an average of expected short-term rates is an important

. component of interest rates on long-term bonds.
Difficulty: Medium
Est time: <1 minute

76. The liquidity premium theory of the term structure proposes:
A. it is the relative supply and demand of securities in the various maturity

ranges that determines yields.
B. investors have a preference for short-term bonds, as they have greater

liquidity.
C. longer-term bonds have less default

risk.
D. longer-term bonds are less volatile in

price.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

77. Support for the addition of a liquidity premium to the expectations theory is
derived from:
A. the slope of the observed normal yield curve is steeper than that of
expectation theory.
B. the slope of the observed normal yield curve is flatter than that of
expectation theory.
C. the liquidity premium decreases over time.
D in times of tight monetary policy an inverse yield curve

. becomes more inverse.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

78. If the yield curve is observed to be flat, according to the liquidity premium theory,
this indicates that the market is predicting:
A. a small rise in short-term rates in the near future and a small decline
further out in the future.
B. constant short-term interest rates in the near future, and further out in
the future.
C a small decline in short-term interest rates in the near future,

. continuing to decline slowly further out in the future.
D constant short-term interest rates in the near future and a small

. decline further out in the future.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

79. The risk structure of interest rates refers to the:
A. amount of extra interest necessary to compensate investors for the greater

default risk of some bonds.
B. relationship among the interest rates on bonds with the same

maturity.
C. relationship among the interest rates on similar bonds with

different maturities.
D amount of extra interest needed to compensate investors for

. the lesser liquidity of some bonds.
Difficulty: Medium
Est time: <1 minute
interest rates.

80. Generally, an increase in default risk will result in a/an _______ required return or
interest rate.
A. lowe
r
B. higher
C. unaltered
D. undetermined
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

81. Represented below are yield curves for the following securities:
i. Bank-accepted bills
ii. Treasury notes
iii. Promissory notes
iv. Negotiable certificates of deposit
Based on your understanding of the risk structure of interest rates, rank the
securities in order from curve A to curve D.
A. i, ii, iv,
iii
B. ii, i, iv,
iii
C. ii, iv, i,
iii
D. iv, ii, iii,

i
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
interest rates.
82. As a factor explaining yield differences between Australian Treasury bonds,

default risk is:
A. important, but other factors such as market risk are more

crucial.
B. always an important
factor.
C. rarely important.
D. never an issue.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.
83. In relation to the risk structure of interest rates:
A. the yield on a BBB rated bonds is higher than an AA-rated

bond.
B. the risk premium of borrowers may vary over

time.
C. the government bonds are assumed to be the benchmark rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

84. For debt instruments, if interest rates increase:
A. prices of long-term bonds will increase more than short-term

bonds.
B. prices of short-term bonds will increase more than long-term

bonds.
C. the coupons of long-term bonds will increase more than short-

term bonds.
D. coupons of long-term bonds will increase more than short-

term bonds.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
interest rates.

85. Unsecured notes are generally:
A. more risky than debentures.
B. less risky than Treasury

bonds.
C. less risky than Treasury

notes.
D. less risky than commercial

paper.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

86. During periods of economic recession, it is probable that the risk premium gaps for
different corporate borrowers will:
A. decrease
.
B. increase
.
D. widen
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
interest rates.

calculate the expected (E) rate of interest of a one-year investment that will be
available in 12 months' time (1i1), given the following data:
A. 7.75% per
annum
B. 8.25% per
annum
C. 8.75% per
annum
D. 9.25% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
interest rates.

calculate the expected (E) rate of interest of a two-year investment that will be
available in 12 months’ time (1i3), given the following data:
Current rate of return on a three-year maturity (0i3) instrument: 8.65% per annum
A. 8.35% per
annum
B. 9.10% per
annum
C. 9.56% per
annum
D. 19.03% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
interest rates.

89. If investors are not indifferent to whether they hold long-term or short-term
securities, and need a liquidity premium to hold longer term securities, an investor
who needs a liquidity premium of 0.25% per annum will expect to receive _______
on a two-year investment, given the following data:
8.55% per annum

(E1i1)
A. 8.51% per
annum
B. 8.63% per
annum
C. 8.80% per
annum
D. 8.88% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
interest rates.
90. If the current account of the balance of payments of a country is significantly in

deficit, the central bank will generally lower interest rates in order to help
borrowers with their interest rate costs.
FALSE
A central bank will generally increase interest rates if the current account is
significantly in deficit.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
91. Unfortunately, economic indicators don't provide clear and unambiguous messages
about the future direction of economic activity and growth.
TRUE
Often releases of new data or information present conflicting indications.

Difficulty: Medium
Est time: <1 minute
92. The liquidity effect of expansionary monetary policy is likely to see interest rates
fall in the first place but as the pace of economic activity increases the income
effect is likely to result in a rise in the interest rates in the market.
TRUE
Money market operations such as direct buying of government securities affect the
money supply and level of liquidity in the financial system.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

93. According to the loanable funds approach, the supply of loanable funds is derived
from the government sector and the business sector.
FALSE
Supply is from the household sector, changes in money supply and dishoarding.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
94. An increase in interest rates is likely to result in a permanent, higher level of

hoarding.
FALSE
An increase in interest rates is likely to result in a higher level of dishoarding.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
95. The term structure of interest rates describes how interest rates move over time.
FALSE
It is the relationship between interest rates and term to maturity for debt
instruments in the same risk class.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
96. When yield curves are downward-sloping, long-term interest rates are above short-
FALSE
When yield curves are downward-sloping, short-term interest rates are above long-
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. According to expectations theory of term structure, a normal curve will result from
expectations that future short-term rates will be higher than current short-term
rates.
TRUE
According to this theory since the market believes that future short-term rates will
be higher than current short-term rates, the yield curve will be upward-sloping.
98. According to the liquidity premium theory of term structure, a mildly upward-
sloping yield curve suggests the market is predicting constant short-term interest
rates.
TRUE
A liquidity premium is suggested to change the slope so that if the market is

predicting little change, once liquidity premium is added, the slope appears mildly
upward-sloping.
99. The risk structure of interest rates describes the relationship between interest rates
of different bonds with the same maturity.
TRUE
Securities issued by different borrowers will have different levels of risk such as
default risk. The yields offered by them will differ in their margin above the risk-
free rate of government bonds.
100. Discuss when a central bank will generally increase interest rates.
After forming economic variables such as balance of payments and a view on the
desired level of economic activity and employment, a central bank will generally
increase interest rates for some of the following: if the rate of inflation over the
business cycle is outside its target range; if the rate of growth in gross domestic
product is too high; if the current account of the balance of payments is
significantly in deficit; if credit growth and associated debt levels are growing too
rapidly; or if the currency is under excessive downward pressure in the foreign
exchange markets.
101. Discuss the difficulties a central bank faces in trying to forecast how liquidity,
income and inflation effects in relation to interest rates will be affected by interest
rate changes.
One of the problems is that often releases of new information or data on the state of
the economy present conflicting indications, with some data indicating a slowdown
while other data suggesting that the economy is still growing. With different
sectors of the economy often experiencing different growth patterns, the problem is
compounded.
102. Define and discuss briefly the three common types of economic indicators.
Economic indicators are often divided into: leading indicators that change before
changes in the trend in the level of economic activity, coincident indicators that
provide same-time tracking of the level of economic activity and lagging indicators
that change after a change in the business cycle. However, as no single indicator is
constantly in one category, numerous indicators are analysed by market
participants.
103. In the context of the loanable funds theory, discuss the sectors that have a demand
for funds in relation to demand and supply curves.
The two sectors of the overall economy that demand funds are the businesses that
demand funds for short-term working capital and for longer-term investment. The
second sector is the government that demands funds for intra-year liquidity and for
the case of a budget deficit.
104. In the context of the loanable funds theory, discuss the sectors that supply funds in
relation to demand and supply curves.
Sources of funds are the savings of the household sector that are relatively
insensitive to increases in interest rates, changes in the money supply through
actions of a central bank and the proportion of total savings in an economy held as
currency that changes with interest rates. For example, when interest rates increase
there is the incentive to buy more securities to obtain the increased yields, so
decreasing the amount of currency holdings.
Chapter 14
1. Large fluctuations in interest rates:
A have led to substantial capital gains and losses for

. owners of securities.
B have increased the need for companies to

. manage their interest-rate exposure.
C. increase the demand for derivative

products.
D mean all of the given choices

. are correct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 14.1 Understand interest rate risk and various techniques that may be used in the measurement of
interest rate risk exposures.
2. The sensitivity of future cash flows and the value of assets and liabilities
to movements in interest rates is called:
A. financial risk.
B. business
risk.
C. interest rate
risk.
D. liability risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 14.1 Interest rate risk
3. Interest rate risk occurs when:
A. investors buy bond portfolios.
B. a firm has a short-term floating rate

loan.
C. a company has issued a fixed

interest bond.
D all of the given answers are

. correct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

4. The interest rate risk of a bond is the:
A. risk related to the possibility of default by the bond's

issuer.
B risk that arises from the uncertainty of the

. bond's return, caused by the change in interest
rates.
C unsystematic risk caused by factors

. relating solely to the bond.
D risk caused by foreign

. exchange changes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

5. According to the text, two forms of interest rate risk are:
A. price risk and default risk.
B. reinvestment risk and systematic

risk.
C. credit risk and price risk.
D. price risk and reinvestment

risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

6. In relation to interest rate risk, reinvestment rate risk refers to the risk:
A. associated with a shortfall in interest

payments.
B. of reinvesting in riskier
assets.
C of reinvesting in bonds of low

. investment grade.
D of reinvesting at unknown
. interest rates.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

7. If a company has a three-year loan from a bank at 7% per annum, and
interest rate dropped to 5% near the end of the term, the bank is exposed
to:
A. interest rate
risk.
B. reinvestment risk.
C. yield-to-maturity
risk.
D. systematic risk.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

8. Over the lifetime of a bond, the coupons received by the holder of the
bond are exposed to:
A. financial risk.
B. liquidity
risk.
C. price risk.
D. reinvestment risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

9. If the maturity of a portfolio of deposits for a bank is longer than its
portfolio of term loans, the bank is exposed to:
A. interest rate
risk.
risk.
D. systematic risk.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

10. If a bond investor's holding period is longer than the term to maturity of a
bond, the investor is exposed to:
A. interest rate
risk.
risk.
D. systematic risk.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

11. If a company has issued a fixed-interest bond to investors and then later
interest rates fall on comparable securities, the value of the existing fixed-
interest bond:
A. will
increase.
B. will decrease.
C. will be
unaffected.
D depends only on the credit

. risk of the issuer.
Difficulty: Medium
Est time: <1 minute

12. When a change in interest rate affects the value of assets, liabilities and
future cash flows, this is called _____ interest rate risk.
A. basis
B. direc
t
C. indirect
D. reinvestment
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

13. When a change in interest rate influences the future actions of market
participants, this is called _____ interest rate risk.
A. basis
B. direc
t
C. indirect
D. reinvestment
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

14. When there are pricing differentials between markets as a result of
interest rate changes or expectations, this is called _____ interest rate
risk.
A. basis
B. direc
t
C. indirect
D. reinvestment
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

15. If the current yields on three-year corporate bonds are 7% per annum and
on the same day the yield in the futures market for comparable bonds is
6.50% per annum, the interest rate difference is due to:
A. business
risk.
B. basis risk.
C. credit
risk.
D. financial risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

16. If a bank increases interest rates on its loans for its customers and then
they seek new loans from other banks this interest rate exposure is called
_____ interest rate risk.
A. direc
t
B. indirect
C. basis
D. reinvestment
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

17. Techniques to manage interest rate exposure include:
A. diversifying between short-term and long-term debt

issues.
B monitoring and adjusting the maturity structure

. of assets and liabilities.
C financing short-term and long-term

. debt through both intermediated and
direct finance.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 14.2 Identify components of an interest rate risk exposure management system.
Section: 14.2 Exposure management systems

18. The relative proportion of a company's assets and liabilities maturing at
different time intervals is:
A. investment
structure.
B. maturity
structure.
C. term structure of interest rates.
D. the yield
curve.
Difficulty: Easy
Est time: <1 minute

19. When a firm's funding is a mixture of short-term and long-term debt
issues, it is carrying out:
A. asset management.
B. liability
diversification.
C. securitisation
management.
D. asset diversification.
Difficulty: Easy
Est time: <1 minute

20. When there is an upward sloping yield curve and interest rates are
forecast to increase a firm decides to restructure its outstanding debt to
longer term then in the short-term the company:
A. faces an immediate decrease in its costs of funds.
B. faces an immediate increase in its costs of

funds.
C. is reducing its basis risk.
D. is reducing its business risk.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

21. The procedure of creating marketable debt instruments that are backed by
otherwise illiquid assets is known as:
A. homogenisation
.
B. securitisation
.
C. standardisation.
D. hybridisation
.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

22. The bundling of mortgages into a saleable security (usually for large
institutional investors) is called:
A. disintermediation.
B. futures
bundling.
C. hedge packaging.
D. securitisation
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

23. The acronym ARBL used in risk management stands for:
A. assets repackaged by means of their

liquidity.
B. assets repriced before

liquidity.
C. assets repriced before

liabilities.
D. acceptance risk balanced

limits.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 14.3 Consider the principle of assets re-priced before liabilities.
Section: 14.3 Assets re-priced before liabilities principle

24. When a financial institution matches its interest rate-sensitive assets with
its interest-sensitive liabilities:
A. all assets have the same

maturity.
B. all liabilities have the same

maturity.
C. it typically earns no
profit.
D. interest rate risk is

neutralised.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

25. If interest rates are forecast to rise and a company has achieved a positive
ARBL this means:
A. it is disadvantaged if interest rates

rise.
B. it can benefit in the short-term if interest rates

increase.
C. its profits may be adversely

affected.
D it has a negative impact on its

. profit margins.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

26. If a bank expects interest rates to fall, then it will want to:
A. achieve a positive
ARBL.
B. achieve a negative
ARBL.
C lower the rate on its loans before it

. lowers the rates on its deposits.
D increase the rates on its loans

. before it lowers the rates on its
deposits.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

27. An interest-sensitive asset or liability must:
A. have a maturity of less than 90 days.
B have a rate that shifts in the opposite direction

. to market changes.
C have a rate that changes as market

. conditions alter during the
organisation's specified planning
period.
D always be an asset issued for

. a short-term period.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 14.5 Analyse the structure and benefits associated with interest rate risk measurement using re-
pricing gap analysis.
Section: 14.5 Re-pricing gap analysis

28. Which of the following is NOT an interest-sensitive asset for a six-month
planning period?
A. Floating rate mortgages
B. Securities with a maturity of less than 90

days
C. Fixed-rate
mortgages
D A 181-day negotiable
. certificate of deposit
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

29. Which of the following is NOT an interest-sensitive asset for a three-
month planning period?
A. Floating rate mortgages
B. Securities with a maturity of less than 30

days
C. Fixed-rate
mortgages
D A 181-day negotiable
. certificate of deposit
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

30. Which of the following is an interest-sensitive asset for a three-month
planning period?
A. A six-month Eurodollar time

deposit
B. A 20-year
mortgage
C A floating rate mortgage due for

. adjustment in four months
D A Treasury bond with less

. than 30 days to maturity
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

31. If an organisation has more interest-sensitive assets than liabilities, a
_______ in interest rates will _______ the organisation's profits.
A. rise; increase
B. rise; decrease
C. fall;
increase
D. fall; not
affect
Difficulty: Medium
Est time: <1 minute

32. If an organisation has more interest-sensitive liabilities than assets, a
_______ in interest rates will _______ the organisation's profits.
A. rise; increase
B. rise; decrease
C. fall;
increase
D. fall; not
affect
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

33. If an organisation has _______ interest-sensitive assets than liabilities,
a/an _______ in interest rates will increase the organisation's profits.
A. more; reduction
B. more; increase
C. less; increase
D both [more; reduction] and

. [less; increase] are correct
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

34. The difference between interest-sensitive assets and interest-sensitive
liabilities is termed the:
A. interest-sensitivity index.
B. rate-risk index.
C. gap
.
D. duration
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

35. When interest-sensitive assets are financed by interest-sensitive liabilities,
changes in interest rates will affect:
A. only interest-sensitive
assets.
B. only interest-sensitive
liabilities.
C both interest-sensitive assets and

. interest-sensitive liabilities.
D. only long-term assets.
Difficulty: Easy
Est time: <1 minute

36. The analysis that involves measuring an organisation's sensitivity of
profits to changes in interest rates, by multiplying the difference in rate-
sensitive assets and liabilities by the changes in interest rate, is called:
A. basic duration analysis.
B. repricing gap
analysis.
C. interest exposure
analysis.
D. gap-exposure analysis.
Difficulty: Easy
Est time: <1 minute

37. Refer to the following table:
Premier National Bank
Assets Liabilities
Interest-sensitive $60 million $90 million
Fixed-rate $70 million $40 million
Premier National bank has a repricing gap of:
A. -
30
B. +3
0
C. +6
0
D. 0
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
Premier National Bank
Assets Liabilities
If interest rates rise by 500 basis points, bank profits (measured using
repricing gap analysis) will:
A. fall by $0.5 million
B. fall by $1.5 million
C. fall by $3 million
D. increase by $1.5
million
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

First Nationwide Bank
Assets Liabilities
First Nationwide bank has a repricing gap of:
A. -
10
B. +1
0
C. +2
0
D. 0
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

40. In relation to re-pricing gap analysis which of the following is a

constraint on the model?
A. The appropriate planning period.
B. The timing of cash flows within a planning

period.
C The assumption of an even interest

. rate change.
D. All of the given

answers.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

41. When interest rates move from 9 to 10% per annum for a three-year bond
paying a 9% per annum coupon, the:
A. coupon rate becomes higher than the current market

yield
B present value of the bond becomes higher than

. the face value
C current yield becomes higher than

. the coupon rate
D current price of the bond will

. increase
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

First Nationwide Bank
Assets Liabilities
If interest rates rise by 500 basis points, bank profits (measured using
repricing gap analysis) will:
A. fall by $0.5 million.
B. fall by $1.5 million.
C. increase by $0.5 million.
D. increase by $1.5
million.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
43. If an organisation has a repricing gap equal to a positive $20 million, a

500 basis point drop in interest rates will cause profits to:
A. rise by $1.0
million.
B. rise by $10
million.
C. fall by $1.0 million.
D. fall by $10 million.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
44. If an organisation has a repricing gap equal to a positive $20 million, a

500 basis point increase in interest rates will cause profits to:
A. rise by $1.0
million.
B. rise by $10
million.
C. fall by $1.0 million.
D. fall by $10 million.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

45. If an organisation has a repricing gap equal to a negative $30 million, a
500 basis point increase in interest rates will cause profits to:
A. rise by $15
million.
B. rise by $1.5
million.
C. fall by $15 million.
D. fall by $1.5 million.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

46. If a financial organisation has a repricing gap equal to a negative $30
million, a 500 basis point drop in interest rates will cause profits to:
A. rise by $15
million.
B. rise by $1.5
million.
C. fall by $15 million.
D. fall by $1.5 million.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

47. If a financial organisation has a positive repricing gap, what happens if
managers do not take action when interest rates decline?
A. Interest-sensitive liability costs stabilise
B. Interest-sensitive assets returns

decline
C The rate differential on the repricing

. gap remains unaffected
D Expected pre-tax profits will

. not change, as the cost of
interest-sensitive liabilities will
decrease
Difficulty: Medium
Est time: <1 minute

48. The duration of a bond is related to:
A. yield to
maturity.
B. coupon
rate.
C. time to
maturity.
D. all of the given

choices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 14.6 Analyse the structure and benefits associated with interest rate risk measurement using
duration and convexity.
Section: 14.6 Duration

49. The measure that takes into account the timing and present values of cash
flows associated with financial assets or liabilities is:
A. convexity
.
B. duration
.
C. novation.
D. ARBL.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

50. In order to compare the risk properties of two bonds with different
coupons and maturities a bond fund manager may use:
A. repricing gap
analysis.
B. duration analysis.
C. technical
analysis.
D. liability
analysis.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

51. Calculate the duration of a five-year bond with face value $1000, fixed
coupon of 8% per annum, with current market yields of 9%.
A. 4.13 years
B. 4.30 years
C. 4.72 years
D. 5.00 years
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

52. The duration of a 10-year, 10% per annum coupon bond, when the
interest rate is 10%, is 6.76 years. What happens to the price of the bond
if interest rates fall to 8% per annum? The price:
A. rises by 20%.
B. rises by 12.3%.
C. falls by 20%.
D. falls by 12.3%.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

53. All things being equal, the duration of a bond is positively correlated with
the bond's:
A. yield to
maturity.
B. coupon
rate.
C. time to
maturity.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

54. The duration of securities can be used to estimate their sensitivity to:
A. default
risk.
B. holding period yields.
C. interest rate
risk.
D. reinvestment risk.
Difficulty: Easy
Est time: <1 minute

55. Which of the following statements about duration is incorrect?
A Duration is superior to time to maturity as a measure of

. price sensitivity to interest rate changes.
B Holding other things constant, the duration of a

. bond increases with time to maturity.
C Given time to maturity and yield to

. maturity, the duration of a bond is
higher when the coupon rate is lower.
D Given time to maturity, the

. duration of a zero coupon bond
decreases with yield to
maturity.
AACSB: Analytic
Bloom's: Evaluation
Difficulty: Hard
Est time: <1 minute

56. The duration of a coupon bond is:
A. greater than the maturity of the bond.
B. equal to the maturity of the bond.
C decreases when its maturity of the

. bond increases.
D a measure of the length of time

. it takes to repay the cost of the
bond.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

57. The duration of a four-year zero coupon bond is:
A. larger than
four.
B. smaller than
four.
C. equal to
four.
D equal to that of a four-year

. 5% coupon bond.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

58. Everything else being equal, the _______ the time to maturity on a fixed-
interest security, the _______ sensitive it is to changes in interest rates.
A. longer;
less
B. longer;
more
C. shorter; more
D. shorter; extra
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

59. A three-year bond with a current yield of 10% per annum and a duration
of 2.76 years, when compared with a four-year bond with a current yield
of 12% per annum and duration of 3.43 years, will _______ when interest
rates rise.
A. have a greater fall in

price
B. have a smaller fall in

price
C. have the greater interest rate

exposure
D. not alter in
price
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

60. Duration analysis involves comparing the average duration of an
organisation's _______ with the average duration of its _______.
A. loan portfolio; non-deposit

liabilities
B. loan portfolio; deposit liabilities
C. securities portfolio; non-deposit

liabilities
D. assets;
liabilities
Difficulty: Medium
Est time: <1 minute

61. When the duration of a portfolio's assets matches the duration of its
liabilities, adjusted for leverage, it is:
A. exposed to interest rate risk.
B. immunised against interest rate risk.
C. protected against default

risk.
D. exposed to credit risk

only.
Difficulty: Easy
Est time: <1 minute

62. If a bank has a duration gap of two years, a rise in interest rates from 5 to
8% per annum will lead to a/an:
A. increase of 5.71% in the market value of its net

worth.
B. fall of 5.71% in the market value of its net

worth.
C. increase of 5.71% in net interest

income.
D fall of 5.71% in net interest

. income.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

63. If a bank has a duration gap of two years, a fall in interest rates from 5%
to 8% per annum will lead to a/an:
A. increase of 5.71% in the market value of its net

worth.
B. fall of 5.71% in the market value of its net

worth.
C. increase of 5.71% in net interest

income.
D fall of 5.71% in net interest

. income.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

64. If a fall in interest rates causes a bank's market value of net worth to rise,
the bank must have a:
A. positive duration gap for its portfolio of assets and

liabilities.
B negative duration gap for its portfolio of assets

. and liabilities.
C. negative
gap.
D. positive gap.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

65. If a rise in interest rates causes a bank's market value of net worth to rise,
the bank must have a:
A. positive duration gap for its portfolio of assets and

liabilities.
B negative duration gap for its portfolio of assets

. and liabilities.
C. negative
gap.
D. positive gap.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

66. Which of the following is a technique that an institution with rate-
sensitive assets could perform in order to reduce interest rate risk?
A. Buy short-term Treasury

bills
B. Issuing long-term certificates of

deposit
C. Purchasing longer term assets
D. None of the given

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

67. Which of the following is a technique that an institution with rate-
sensitive liabilities could perform in order to reduce interest rate risk?
A. Using an interest-rate swap
B. Making more short-term

loans
C. Issuing long-term certificates of

deposit
D. All of the given

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

68. One problem with duration gap analysis is that it:
A. is calculated assuming that the yield curve does not

change.
B. is calculated assuming the yield curve is

flat.
C does not measure the sensitivity of net

. worth to interest rate changes.
D does not measure the

. sensitivity of income to
interest rate changes.
Difficulty: Medium
Est time: <1 minute

69. Which of the following statements about the limitations of duration
analysis is incorrect?
A It assumes that the term structure of interest rates changes

. by an equal number of basis points.
B. It assumes that the yield curve is always

upward-sloping.
C Duration needs to be regularly

. recalculated as interest rates change.
D The pricing of fixed-interest

. securities displays convexity.
Difficulty: Medium
Est time: <1 minute

70. Which of the following duration analysis is incorrect?
A Duration can be used to calculate the dollar value impact

. of an interest rate change on the value of a security.
B The duration of a portfolio is the weighted

. duration of each asset or liability in the
portfolio.
C A longer term bond with a higher

. duration than a short-term bond is
faced with higher interest rate risk.
D Duration analysis assumes that

. yield curves are normal or
upward sloping.
Difficulty: Medium
Est time: <1 minute

71. With a four-year bond of face value $1000 paying an annual coupon of
6%, if current market yields of 6% change to 7%:
A. its duration will increase.
B the duration price formula will underestimate

. the change in price.
C the duration price formula will

. overestimate the change in price.
D. its duration will

decrease.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
Section: 14.7 Convexity

72. For a given bond, the curvature of the price-yield curve is termed:
A. modified
duration.
B. immunisation.
C. sensitivity
.
D. convexity
.
Difficulty: Easy
Est time: <1 minute

73. In general, all other factors held constant, the longer the time to maturity
of bonds, the smaller the rate of the change of value will be. This property
of coupon bonds is often referred to as:
A. duration
.
B. coupon
effect.
C. convexity
.
D. yield
effect.
Difficulty: Medium
Est time: <1 minute

74. Because of convexity of the price/yield curve of fixed-interest securities,
when interest rates _______, duration will _______ the change in price.
A. rise;
underestimate
B. rise;
overestimate
C. fall; overestimate
D. fall; not
affect
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

75. Because of convexity of the price/yield curve of fixed-interest securities,
when interest rates _______, duration will _______ the change in price.
A. fall; overestimate
B. fall; underestimate
C. rise;
underestimate
D. rise; not
affect
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

76. When a firm decides to lower its debt-to-equity ratio and implement a
strategy to sell excess assets and buy back some outstanding debt issues,
it is:
A. carrying out asset and liability

repricing.
B. reducing its exposure to interest rate

risk.
C carrying out external interest rate

. management.
D improving its working capital

. management.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 14.7 Appreciate the availability of both internal and external interest rate risk management
techniques.
Section: 14.8 Interest rate risk management techniques

77. Which of the following is NOT an internal method of interest rate risk
management?
A. Changing the timing of cash flows
B Changing the structure of the balance sheet to

. minimise exposure
C. Using forward rate agreements
D Imposing a financial penalty

. for early repayment of a loan
Difficulty: Medium
Est time: <1 minute
techniques.

78. Which of the following is NOT an external method of interest rate risk
management?
A. Using an interest rate

swap
B. Using financial futures
C Using an off-balance-sheet strategy,

. such as a forward rate agreement
D Having fixed-interest assets

. financed by fixed-interest
liabilities and equity
Difficulty: Medium
Est time: <1 minute
techniques.

79. As part of risk management when a company changes the timing of its
cash outflows to minimise the effect of interest rate changes, this
technique is called:
A. an external technique of interest rate management.
B. an internal technique of interest rate

management.
C. a repricing gap
technique.
D. a duration technique.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
techniques.

80. Two basic strategies for reducing the effects of interest rate risk include
using hedging strategies and:
A. buying financial futures contracts.
B. selling options on
futures.
C. forecasting interest
rates.
D. financing long
term.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
techniques.

81. Interest rate risk is the sensitivity of balance-sheet assets and their
associated cash flows to movements in interest rates.
FALSE
The sensitivity of liabilities needs to be considered as well.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
82. If a company has issued a fixed-interest debenture and interest rates on

similar securities later fall, the value of the existing company debenture
will increase.
TRUE
As the fixed-interest debenture has a higher interest rate its value will
have increased.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 14.4 Revisit the pricing of financial securities and consider its relationship to interest rate risk
exposures.
Section: 14.4 Pricing financial securities
83. In the context of interest rate risk, reinvestment risk occurs when a fall in
interest rates causes bond coupons to earn less than before.
TRUE
Lower market interest rates will result in lower yields received by the
bond holder.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

84. When a firm raises funds from a range of different sources, this is known
as liability diversification.
TRUE
A company may diversify between short-term and long-term debt and try
not to be limited to a single source of funds.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
85. A positive ARBL gap means that there is an upward movement in interest
rates.
FALSE
A positive ARBL gap means assets are re-priced before liabilities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. If interest rates are forecasted to rise, if a bank increases the interest rate
it pays on its customer deposits before it has to raise its interest rates on
its loans its net interest margin will improve.
FALSE
If interest rates are forecasted to rise, if a bank increases the interest rate
on its loans before it has to raise its interest rates it pays on its customer
deposits its net interest margin will improve.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

87. When interest rates are expected to fall, an organisation will try to have a
negative ARBL gap.
TRUE
A bank will try to lower the interest rate it pays on deposits before it
lowers the rates it receives on its loans.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
88. Repricing-gap analysis is the monitoring of the interest rate sensitivities

of an organisation's assets.
FALSE
Repricing-gap analysis is the monitoring of the interest rate sensitivities

of an organisation's assets and liabilities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. For repricing gap analysis, fixed-rate assets and liabilities are combined
in the calculation with interest-sensitive assets and interest-sensitive
liabilities to obtain an overall net effect.
FALSE
After classifying assets and liabilities, rate-sensitive liabilities are

subtracted from rate-sensitive assets.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

90. When interest rates rise, a three-year bond with a lower duration has the
greater interest rate exposure than a four-year corporate bond with a
higher duration.
FALSE
When interest rates rise, a three-year bond with a lower duration has
lower interest rate exposure than a four-year corporate bond with a higher
duration.
AACSB: Analytic
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

91. Within the context of an interest rate exposure management system,
discuss strategies that an organisation may develop to measure and
manage its interest rate risk exposures.
The strategies will relate to the types of interest rate cash flows associated
with the organisation's assets and liabilities. An organisation may have
policies about what mixture of fixed and floating rate debt it should have
and what actions it should take to adjust the mixture if interest rates are
forecasted to change. Another strategy involves what actions it will take
to alter the maturity structure of its assets and liabilities, given the current
term structure of interest rates. For example, a strategy that results in a
shift of the liability structure of a firm will have an impact on the cost of
funds. Another risk management strategy is liability diversification where
a company may consider diversifying between short-term and longer-
term debt through both intermediated finance and direct finance.
Strategies can involve internal risk management techniques and external
methods.
Bloom's: Synthesis

92. Within the context of financial risk management, discuss internal and
external methods for interest rate risk.
First, internal methods involve management through the alteration of an

organisation's balance sheet and associated cash flows. For example, a
firm may change the pricing structure associated with its assets and
liabilities by seeking more fixed-rate funds when interest rates are
forecast to rise. External interest-rate risk management techniques
involve methods outside the balance sheet and entail the use of derivative
products such as futures and forwards.
Bloom's: Knowledge
techniques.
93. Duration can be used for interest rate risk measurement. Explain how it is
used.
Duration, arrived at by combining the timing and present value of cash

flows associated with a financial asset or liability into one measure, can
be used to compare different assets and liabilities. For example, for a
investor with two bonds: a three-year bond with a duration of 2.95 years
and the other, a 10-year bond with a duration of 8.45 years, the interest-
rate risk for the three-year bond with the smallest duration is lower.
Another use is in ascertaining the dollar impact of a change in interest
rates on the value of a security. The change in value will be proportional
to the duration but opposite in direction. It can also be used in
conjunction with a portfolio of assets and liabilities.
Bloom's: Synthesis
94. Discuss duration in combination with the relationship between bond

prices versus changes in yields.
Duration can be used to calculate the percentage change in price of an

asset or liability for a change in interest rates. However, if interest rates
rise duration will overestimate the change of price and if interest rates fall
duration will underestimate the change in price. This mismatch is shown
on the bond price/yield curve.
AACSB: Analytic
Est time: <1 minute
95. Discuss the internal interest rate risk management techniques of asset and
liability repricing and asset and liability portfolio restructuring.
Internal methods of interest rate risk management are those strategies and
techniques that involve changes to the balance sheet and the cash flow of
an organisation. They include asset and liability portfolio restructuring
such as a fund's manager reducing interest rate risk by selling part of the
bond portfolio. Asset and liability repricing is another technique where
firms that have borrowed funds measure the potential impact of a
potential rise in interest rates and, if they are exposed with variable
interest rates, try to arrange with their bank for some part to be fixed. The
cash-flow timing in relation to interest payments could be investigated to
see if the frequency of payments could be changed. A business could look
at its debt-equity ratio to see whether it may reduce its debt if it has high
debt levels. Where financial institutions have given customers loans and
interest rates are forecast to drop, the institution faces the risk the
customer will try to repay the loan early. So prepayment and pre-
redemption conditions can impose a financial penalty on the borrower.
Chapter 15
1. The value of FX daily transactions in the global FX markets is estimated
to be:
A. USD 2000 billion.
B. USD 3000 billion.
C. USD 5400 billion.
D. USD 5000 billion.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.1 Understand the nature, size and scope of the global FX markets and the main exchange rate
regimes used by different countries.
2. Most foreign exchange transactions are conducted:
A. by governments.
B. by
tourists.
C. in the FX over-the-counter
markets.
D on the Australian Securities

. Exchange.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. The foreign exchange market is where:
A. exports and imports are traded.
B. exports and imports are interchanged for gold

bullion.
C. different currencies are bought and

sold.
D companies organise their

. foreign long-term financing.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. The institutions that transact between the foreign exchange (FX) dealers
in banks and act as principals in the FX market are called the:
A. foreign-currency dealer
houses.
B. currency syndicates.
C. foreign-exchange brokers.
D inter-bank currency
. clearinghouses.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. A large international organisation representing the central banks of the
major developed countries is called:
A. the
OECD.
B. the ECB.
C. Bank for International Settlements.
D. the World Trade

Organization.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. Financial institutions active in the FX markets include:
B. commodity
traders.
C. insurance companies.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. Currently, the largest FX centre is in:
A. New
York.
B. London.
C. Hong
Kong.
D. Tokyo
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. All of the following are primary centres of foreign exchange trading

except:
A. London.
B. New
York.
C. Munich.
D. Tokyo
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. Which of the following about global FX markets is NOT correct?
A Trading in FX is conducted using telephones and

. computer–based technological systems.
B. New York is the largest FX

market.
C The Bank for International Settlements

. estimates turnover in excess of USD
4000 billion.
D A free float FX regime is one
. where the exchange rate moves
according to the forces of
supply and demand.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 15.1 Exchange rate regimes
10. If the value of a currency is determined by market forces, this is regarded

as a:
A. partial floating
regime.
B. floating rate
regime.
C. managed floating regime.
D. crawling peg regime.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
11. If the value of a currency moves within a defined band, relative to another
major currency this is a:
A. partial floating
regime.
B. floating rate
regime.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
12. An exchange rate regime that allows the currency to appreciate gradually
over time but within a specified limited band set by government is a:
A. partial floating
regime.
B. floating rate
regime.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The exchange rate where the value of the pegged currency is tied into the
value of another currency or basket of currencies is a:
A. crawling peg regime.
B. floating rate
regime.

D. linked exchange rate
regime.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. A managed float exchange rate regime is one which limits exchange rate
movements within a band that is set by:
A. the major
banks.
B. the central
bank.
C. government
legislation.
D. the major FX traders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. A floating exchange rate regime is one:
A which limits exchange rate movements within a band that

. is set by the major banks.
B which limits exchange rate movements within a

. band that is set by the central bank.
C exchange rate for a currency is

. allowed to move as factors of supply
and demand dictate.
D which limits exchange rate
. movements within a band that
is set by the major FX traders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. Foreign exchange brokers:
A. quote two-way prices at which they are willing to buy

and sell at.
B in Australia require an authority from the

. central bank to operate.
C arbitrage price differences between
. the various FX markets.
D seek out the best exchange

. rates and deal mostly with FX
dealers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.2 Identify and discuss the major groups of participants in the FX markets.
Section: 15.2 Foreign exchange market participants
17. The foreign exchange participant who quotes prices at which they are
prepared to buy and sell foreign currencies is a:
A. foreign exchange
broker.
B. foreign exchange
arbitrageur.
C. foreign exchange
dealer.
D. foreign exchange
adviser.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. Foreign exchange market participants who seek out the best FX rates in
the markets and match the buy and sell orders for a fee are called:
A. FX dealers.
B. FX
brokers.
C. FX arbitrageurs.
D. FX day
traders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
19. The financial institutions that quote buy and sell prices and act as
principals in the FX markets are called:
A. FX
brokers.
B. FX dealers.
C. FX arbitrageurs.
D. FX day
traders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
20. Foreign exchange dealers quote _________ at which they are prepared to
deal in foreign currency.
A. ask prices
B. two-way
prices
C. bid prices
D. margin
prices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. The dealer quotes of a buy and a sell price on an FX currency are called:
A. arbitrage quotes.
B. two-way
prices.
C. dealer
spreads.
D. term
quotes.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. Which of the following market participants tend to keep exchange rates
the same in all the world markets?
A. Forward markets
B. Foreign exchange counter

trades
C. Futures markets
D. Arbitrageurs
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. The FX party that conducts buy and sell transactions in two or more
markets simultaneously to take advantage of price differentials is called
a/an:
A. FX
broker.
B. FX
arbitrageur.
C. FX
dealer.
D. FX
agent.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
24. The central bank resources made up of foreign currencies, gold and
international drawing rights are called:
A. central bank
capital.
B. official reserve
assets.
C. central bank
floats.
D. official bank
assets.
Difficulty: Easy
Est time: <1 minute

25. If the value of a currency is influenced by a central bank that intervenes

from time to time in the foreign exchange market, this is regarded as a:
A. partial
float.
B. clean
float.
C. dirty float.
D. soft
float.
Difficulty: Medium
Est time: <1 minute

26. If a FX dealer buys USD from a client and holds USD on its own account
on the expectation of the USD rising in value in the near future, it is
taking a:
A. a hold position in the

USD.
B. a long position in the

USD.
C. a short position in the USD.
D. forward position in the

USD.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

27. If a FX speculator sells USD that the speculator currently does not hold
the speculator has entered into a:
A. a hold position in the

USD.
B. a long position in the

USD.
C. a short position in the USD.
D. forward position in the

USD.
Difficulty: Medium
Est time: <1 minute

28. The holding of foreign currency in the hope of a future sale is called a/an:
A. arbitrage
position.
B. long
position.
C. short position.
D. selling
position.
Difficulty: Medium
Est time: <1 minute

29. An Australian company has received USD in payment for goods
exported. At the time of receiving the USD, the exchange rate is quoted
as AUD/USD 0.5650. Rather than immediately converting the USD into
AUD, the company decides to ‘speculate' on a favourable movement in
the exchange rate. In ‘today + n days' the exchange rate is AUD/USD
0.5750. Which of the following statements is correct?
A. The company has taken a ‘long' position in the USD.
B The exporter company has made a loss on its

. FX position.
C The opportunity cost of interest

. forgone will affect the profitability of
the FX position.
D All of the given answers are

. correct.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

30. For a floating exchange rate, if a central bank does not intervene to
influence the currency this is called a :
A. partial
float.
B. clean
float.
C. dirty float.
D. hard float.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

31. Which of the following statements about the foreign exchange markets is
incorrect?
A Much of the trading volume in the FX markets can be

. described as speculative transactions.
B. Most foreign-exchange trading takes place in

London.
C The FX markets are over-the-counter

. markets.
D Trading volume worldwide

. exceeds USD 4000 billion per
day.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

32. If the Australian central bank wished to cause the AUD to appreciate, it
would _______ AUD and _______ foreign currency.
A. buy; sell
B. sell; sell
C. sell; buy
D. buy;
buy
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

33. If the Australian central bank wished to cause the AUD to _______, it
would _______ AUD and _______ foreign currency.
A. depreciate; buy; sell
B. appreciate; sell; buy
C. depreciate; sell; buy
D. appreciate; buy; buy
Difficulty: Easy
Est time: <1 minute
34. A/An _______ position is when an FX dealer enters into a forward

contract to sell FX that is not held at that time.
A. arbitrage
B. lon
g
C. short
D. dirt
y
Difficulty: Easy
Est time: <1 minute
35. If differences occur for FX rates between three or more currencies, FX

dealers may perform:
A. locational arbitrage.
B. triangular
arbitrage.
C. cross arbitrage.
D. speculative arbitrage.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
36. Given the following rates, what arbitrage profit may be made with respect
to the Australian dollar?
USD 1 = AUD 1.70
USD 1 = SGD 1.70
AUD 1 = SGD 0.96
A. 0.1753 cents
B. 0.5882 cents
C. 1.7526 cents
D. 5.882 cents
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
37. Foreign exchange dealers are regarded as forming a/an __________

market.
A. regulated and organised
B. over-the-
counter
C. auctio
n
D. exclusively broker
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.3 Describe the functions and operations of the FX markets.
Section: 15.3 The operation of the FX market
38. In the FX market, trading:
A. stops after the London markets have

closed.
B is restricted to the hours that the Australian

. banks are open.
C. takes place at any hour of the night

or day.
D stops after the London and
. New York markets have
closed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
39. The physical location of FX dealers, generally within an institution's

treasury room is called an FX:
A. broker's room.
B. dealing room.
C. auction room.
D. quotation
room.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
40. Which of the following statements in relation to the operation of the FX

market is incorrect?
A A corporation will generally need to sell foreign currency

. when it borrows funds from overseas capital markets for
use in its own domestic operations.
B The main trading floor of the Australian FX

. market is located in Sydney, with subsidiary
branches in other main cities.
C The Reserve Bank may conduct FX

. transactions in order to change the
composition of its ‘official reserve
assets'.
D ‘Dealers' in the Australian FX

. market use global electronic
networks such as Bloomberg
and Reuters.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
41. The _______ is the price at which Australian dollars can be converted
into another currency.
A. direct exchange rate
B. spot exchange
rate
C exchange rate between AUD and a

. foreign currency
D. forward exchange
rate
Difficulty: Easy
Est time: <1 minute

Learning Objective: 15.4 List and explain the types of FX transactions, in particular spot and forward transactions.
Section: 15.4 Spot and forward transactions
42. For currency transactions, the spot exchange rate is the rate _______, and
the forward exchange rate is the rate _______.
A. on that day;
today
B. at some specified future date; today
C. today; on that date
D on that date; at some

. specified future date
Difficulty: Easy
Est time: <1 minute

43. In the FX markets, the spot exchange rate can be defined as the:
A. exchange rate that is settled within two business

days.
B. exchange rate that is settled within five

working days.
C. direct exchange rate.
D exchange rate between two

. currencies.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

44. In the FX markets a forward transaction refers to the:
A. spot rate.
B exchange rate that is determined at a specified

. date beyond the spot rate.
C exchange rate that is specified now,

. but with delivery and payment at some
predetermined future date.
D upper limit of a currency bid-

. ask spread.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

45. It is Tuesday, 27 March 201X, and an Australian importing company has
to pay a US exporter USD 75 000 within the next six weeks. The
company enters into a forward exchange contract with an FX dealer for
‘one month forward delivery' of USD. On what date will value settlement
occur?
A. 29 March
201X
B. 27 April
201X
C. 29 April
201X
D. 30 April
201X
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

46. The first currency mentioned in an FX quote is called the:
A. basis
currency.
B. base
currency.
C. root
currency.
D. terms
currency.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.5 Introduce the conventions adopted for the quotation and calculation of spot exchange rates.
Section: 15.5 Spot market quotations

47. The second currency named in an FX quote is called the:
A. basis
currency.
B. base
currency.
C. unit
currency.
D. terms
currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

48. A difference arises between the bid and offer rates of foreign currency
because:
A. the rates are between different dealer

banks.
B. of arbitrage opportunities between

currencies.
C foreign exchange dealers need to

. earn income.
D it takes time to find buyers or

. sellers of foreign currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

49. In general, multi-million transactions _______ the foreign exchange
dealer's bid-offer spread.
A. have no impact on
B. increas
e
C. wide
n
D. narro
w
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

50. In general, the foreign exchange dealer's bid-offer spread _______ with
time to settlement.
A. is not concerned
B. increases
C. decrease
s
D. narrows
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
51. In general, the spread for retail transactions is:
A. quite narrow, about 10

points.
B. in the range of 20 to 30
points.
C. in the range of 10 to 20
points.
D. in excess of 50 points.
Difficulty: Medium
Est time: <1 minute
52. In general, the foreign exchange dealer's bid-offer spread _______ with
increased volatility of FX.
A. is not concerned
B. decrease
s
C. widen
s
D. narrows
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. For a FX quote of AUD/GBP0.6250-53 has a spread of:
A. 250
points.
B. 50
points.
C. 53
points.
D. 3
points.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
54. If a British car sells for £20 000 and the British pound is worth A$2.75,
the Australian dollar price of the car is:
A. $13 333.
B. $30 000.
C. $55 000.
D. $133 333.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
55. Calculate the current exchange rate EUR/JPY, given these two quotes:
USD/EUR 0.9780-90
USD/JPY 119.20-30
A. EUR/JPY 116.57-
79
B. EUR/JPY 116.67-
70
C. EUR/JPY 121.86-
88
D. EUR/JPY 121.76-
98
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
56. Calculate the current exchange rate GBP/JPY, given these two quotes:
USD/JPY 114.20-30
GBP/USD 1.6750-60
A. GBP/JPY 190.71-
88
B. GBP/JPY 191.29-
57
C. GBP/JPY 191.40-
45
D. GBP/JPY 192.07-
24
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
57. Calculate the current exchange rate AUD/GBP, given these two quotes:
AUD/USD 0.5640-50
GBP/USD 1.5850-60
A. AUD/GBP 0.3558-
62
B. AUD/GBP 0.3556-
65
C. AUD/GBP 0.8945-
55
D. AUD/GBP 0.8939-
45
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
58. For spot transactions, the FX contract value date is:
A. that
day.
B. one business day from the day of the

transaction.
C two business days from the day of

. the transaction.
D three business days from the

. day of the transaction.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
59. The convention in the FX markets is that the second-named currency in a

FX quote that is used to express the value is:
A. direct
currency.
B. indirect
currency.
C. terms
currency.
D. unit of the
quotation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

60. The convention in the FX markets is the first-named currency in a FX
quote is:
A. direct
currency.
B. indirect
currency.
C. terms
currency.
D. unit of the
quotation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

61. The convention in the FX markets is the currency on the left hand side of
a quote is:
A. direct
currency.
B. indirect
currency.
C. terms
currency.
D. base
currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

62. The convention in the FX markets is for the first currency mentioned in a
FX quote is:
A. direct
currency.
B. indirect
currency.
C. terms
currency.
D. unit of the
quotation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

63. An Australian export company wishes to sell its euro receipts, EUR 500
000, through an FX dealer and receives the following quote: ‘Aussie
mark spot is one-twenty-two fifty-five to sixty five'. What is the value of
the export receipt?
A. $407 664.09
B. $407 996.74
C. $612 750.00
D. $613 250.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

64. A company treasurer has received the following foreign exchange quote
from an FX dealer: AUD/USD 0.5655-60. For the financial report to the
board of directors, the treasurer is required to ensure the USD is the unit
of the quotation. Which exchange rate quotation will the treasurer include
in the report?
A. AUD/USD 0.5655-
60
B. USD/AUD 1.7668-
83
C. AUD/USD 0.5660-
55
D. USD/AUD 1.7683-
68
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

65. The _______ quote is the number of units of foreign currency an
Australian FX dealer is willing to give, in order to buy the unit of the
quotation, that of AUD 1.
A. direc
t
B. indirect
C. bi
d
D. offe
r
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

66. The _______ quote is the number of units of foreign currency an
Australian FX dealer is willing to take, in order to buy the unit of the
quotation, that of AUD 1.
A. direc
t
B. indirect
C. bi
d
D. offe
r
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

67. In the FX markets a/an _____ quote is where the USD is the base
currency.
A. cross rate
B. direc
t
C. America
n
D. indirect
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

68. In the FX markets a/an _____ quote is where the USD is the unit of the
quotation.
A. cross rate
B. direc
t
C. America
n
D. indirect
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

69. In the FX markets a/an _____ quote is where the USD is the terms
currency and the other currency is the unit of the quotation.
A. cross rate
B. direc
t
C. America
n
D. indirect
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

70. An indirect exchange rate can be converted to a direct exchange rate by:
A. dividing the indirect rate by 100.
B. multiplying the indirect rate by the spot

rate.
C dividing the indirect rate by the

. number of US dollars required to
purchase one unit of the terms'
currency.
D. transposing the indirect

rate.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

71. If it takes 1.25 euros to buy 1 US dollar, the direct quote for the exchange
rate is:
A. 0.25
B. 0.8
C. 1.00
D. 1.25
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

72. A student researching the AUD/USD exchange rate on a particular day is
confused to find the following two quotations:
i. AUD/USD 0.5825-30
ii. USD/AUD 1.7152-67
Which of the following statements is correct?
A. Quote i is the convention adopted in Australia and is a

direct quote
B Quote ii is the convention adopted in Australia

. and is a direct quote.
C Quote i is the convention adopted in

. Australia and is an indirect quote.
D Quote ii is the convention

. adopted in Australia and is an
indirect quote.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

73. For the Aussie/euro spot rate (AUD/EUR 1.8088-1.8098), the percentage
spread is:
A. 1
B. 5.5
C. 10

answers.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

74. When a smaller amount of a foreign currency is required to buy the
Australian dollar, the currency is said to have _______ with respect to the
dollar.
A. appreciated
B. consolidated
C. depreciated
D. remained
fixed
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

75. An Australian company is to export electronic equipment into Europe, in
particular Germany and Sweden, and needs to consider the exchange rate
implications of conducting business in euros and Swedish kroner. Spot
rates quoted are:
USD/EUR 0.9275-85
USD/SEK 8.4531-41
Calculate the EUR/SEK cross-rate.
A. EUR/SEK 0.1097–0.1098
B. EUR/SEK 9.1139–
9.1051
C. EUR/SEK 9.1051–
9.1139
D. EUR/SEK 9.1040–
9.1149
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

76. The difference between the spot rate and the forward rate quotation is the:
A. exchange rate
arbitrage.
B. forward points.
C. interest rate
parity.
D. indirect exchange
rate.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.6 Describe the role of the forward market and calculate forward exchange rates.
Section: 15.6 Forward market quotations

77. The theory that the annual percentage differential in the forward market
for a currency quoted in terms of another currency is equal to the
approximate difference in the interest rates between two countries is
known as:
A. covered interest arbitrage.
B. the Fisher equation.
C. a forward rate
agreement.
D. interest rate
parity.
Difficulty: Easy
Est time: <1 minute

78. The principle of interest rate parity asserts that the:
A relative spot exchange rates determine the relativity

. between the forward exchange rates and spot rates.
B relativity between spot and forward exchange

. rates reflects the interest rate differentials
between countries.
C relative forward exchange rates

. determine the relativity between the
spot exchange rates and the forward
interest rate.
D relative forward exchange rates

. determine the relativity
between the forward exchange
rates and forward interest rates.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

79. If interest rate parity holds, the currency of the country with the relatively
_______ interest rates will trade at a forward _______ to the country with
the relatively high interest rate.
A. low; discount
B. low;
premium
C. low;
loss
D. none of the given choices
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

80. If interest rate parity holds, the currency of the country with the relatively
_______ interest rates will trade at a forward _______ to the country with
the relatively _______ interest rate.
A. high; premium;
low
B. low; discount; high
C. high; discount; low

choices
Difficulty: Easy
Est time: <1 minute

81. An importer will be required to purchase USD in approximately six
months to pay for a consignment of goods. The company is concerned
that the AUD may depreciate before the due date and therefore decides to
enter into a forward exchange contract to protect its position. The
company receives the following quote: ‘the Aussie is fifty-eight forty-five
to fifty-three, sixty-two to sixty six'. Calculate the forward exchange rate.
A. AUD/USD 0.5783-
87
B. AUD/USD 0.5907-
19
C. AUD/USD 0.5911-
15
D. AUD/USD 0.6465-
13
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

82. If the spot rate is AUD/USD 0.5510-0.5515, and the six-month forward
points are 48 to 53, the six-month outright forward rate would be:
A. AUD/USD 0.5462-
0.5462
B. AUD/USD 0.5563-
0.5558
C. AUD/USD 0.5558-
0.5563
D. AUD/USD 0.5558-
0.5568
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

83. If the spot rate is AUD/USD 0.5526-0.5531 and the 90-day forward rate
is AUD/USD 0.5578-0.5588, the AUD is trading at a/an:
A. expected
gain.
B. premium.
C. reciprocal.
D. discount
.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

84. If the forward exchange rate is priced higher than the spot rate the
currency is said to be trading at a:
A. discount
.
B. gain.
C. premium.
D. loss.
Difficulty: Easy
Est time: <1 minute

85. If the forward points are _______at a specific date, the base currency is at
a _______.
A. rising; forward discount
B. falling; forward
discount
C. rising; forward
loss
D. falling; forward
gain
Difficulty: Medium
Est time: <1 minute

86. Given the 3 month forward rate exchange between the USA and
Switzerland is USD/CHF 1.1589 this suggests:
A. that interest rates in the USA are higher than in

Switzerland.
B. the 3 month forward rate is at a

premium.
C that interest rates in the USA are

. lower than in Switzerland.
D a person requires more data

. before making a conclusion.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute

A A currency with a higher interest rate will sell at a

. forward premium.
B A currency with a higher interest rate will sell

. at a forward discount.
C A currency with a higher interest rate

. will have a higher spot rate.
D A currency with a higher

. interest rate will have a lower
spot rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

88. Which of the following principles refers to the circumstance that interest
rates in different countries provide equal returns, taking into account the
spot and forward exchange rates between the two countries?
A. Exchange rate
parity
B. Interest rate
parity
C. Law of one price
D. Purchasing power
parity
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

89. A bank has been asked to provide a three-month forward AUD/USD
‘buy' quote for a corporate client. The following information is available
to the FX dealer at the bank:
Spot rate: AUD/USD 0.7654–0.7659
US interest rates: 7.73% per annum
Australian interest rates: 8.64% per annum
Estimate the three-month forward ‘buy' rate.
A. 0.7637
B. 0.7639
C. 0.7642
D. 0.7644
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

90. A bank has been asked to provide a three-month forward EUR/USD ‘buy'
quote for a corporate client. The following information is available to the
FX dealer at the bank:
Bid Offer
Spot EUR/USD 1.0770 1.0782
3-month US interest rate 3.75% p.a. 3.85% p.a.
3-month euro interest rate 2.65% p.a. 2.75% p.a.
Calculate the bid and ask a three-month forward rate.
A. EUR/USD 1.0796–
1.0781
B. EUR/USD 1.0797–
1.0782
C. EUR/USD 1.0738–
1.0755
D. EUR/USD 1.0743–
1.0750
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
91. All of the following are considered ‘hard' or major currencies, except the:
A. US
dollar.
B. euro
.
C. Mexican
peso.
D. British pound.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.7 Identify factors that complicate FX market price quotations and calculations.
Section: 15.7 Economic and Monetary Union of the EU and the FX markets
92. The financial institution responsible for monetary policy in the European
Union is called the:
A. Bundesbank
.
B. European Parliament.
C. Bank for International Settlements.
D. European Central
Bank.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 15.7 Identify factors that complicate FX market price quotations and calculations.
Section: 15.7 Economic and Monetary Union of the EU and the FX markets
93. The FX market is organised as an over-the-counter market in which
deposits denominated in foreign currencies are bought and sold.
TRUE
The FX markets are vast global markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
94. The largest FX market is based in New York.
FALSE
Owing in part to historical factors, London is the largest FX market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

95. The FX brokers quote two-way prices at which they are prepared both to
buy and sell foreign currencies and act as principals in the FX markets.
FALSE
It is FX dealers that quote bid and ask prices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. If an Australian importer has a contract for Japanese goods denominated

in yen payable in three months' time and is concerned that the AUD may
appreciate, the importer may enter into a forward contract to sell the yen
for delivery in three months' time.
FALSE
The importer should buy a forward contact to buy the yen (and sell the
AUD) in three months' time.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. A USD/YEN quote means the price of USD1 in terms of YEN.
TRUE
The first currency of a quote is the unit of the quotation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. Given USD/EURO0.6450-0.6455 an FX dealer would buy USD1 from

you and give you EURO0.6455
FALSE
The dealer would give you EUR0.6450
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
99. When a currency is quoted against the USD and the USD is the base
currency, this is direct quoting.
TRUE
Having the USD as the unit makes the quote direct.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
100. A rule for working out a bid-ask cross rate for direct and indirect FX
quotations is to multiply the two bid rates and multiply the two ask rates.
TRUE
Multiplying the two bid rates and multiplying the two ask rates gives a
bid-ask cross-rate.
Difficulty: Easy
Est time: <1 minute

101. Given that AUD/USD (spot) is 0.6830-40 and the six-month forward rate
is 0.6798-0.6813, the six-month forward points must have been falling.
TRUE
By calculating the difference the points are seen to be 0.0032-0.0027
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
102. When an FX dealer calculates a forward exchange rate for NZD/JPY they
must adjust both interest rates to allow for the different quotation rates
between Japan and New Zealand.
FALSE
Only one of the rates needs to be adjusted on the basis of Japan using the
360-day convention.
Difficulty: Medium
Est time: <1 minute
103. Discuss the current exchange rate regimes of the major currencies.
Major currencies such as the US dollar, the UK pound, the Japanese yen,
the European Monetary Union euro and the Australian dollar have all
adopted a floating exchange rate regime or a free float. A floating
exchange rate regime exists when an exchange rate for the currency of a
country is allowed to move as the factors of supply and demand decree. If
the demand for a currency increases the value of that currency will
increase relative to other currencies.

104. In relation to exchange rates, discuss a managed float regime, a crawling
peg regime and a pegged exchange rate.
Countries that operate a managed float regime normally allow the

currency to move within a defined band or range, relative to another
currency such as the USD. A crawling peg regime limits exchange rate
movements by being a managed float where an exchange rate is allowed
to appreciate in controlled steps over time. A pegged exchange rate as
used by Hong Kong is where a currency is directly linked to another
currency. In the case of Hong Kong, the Hong Kong dollar is directly
linked to the USD.
Bloom's: Synthesis
105. Discuss briefly why a central bank might enter the FX markets.
Central banks may enter the FX markets in order to pay for a

government's purchases; to change the composition of the central bank's
holdings of foreign currencies as part of its management of official
foreign reserve assets; and to influence a foreign exchange rate.
Bloom's: Knowledge
106. Distinguish between forward transactions and tom value transactions.
The Transactions entered into today, with same-day value or settlement,

are referred to as ‘today’, or tod value transactions. Those entered into
today, for settlement tomorrow, are referred to as ‘tomorrow’, or tom
value transactions. In addition, one way of covering, or hedging, against
that risk is to enter into a forward contract. The basic features of the
forward buying of the EUR are as follows:
• the contract to buy EUR is entered into today
• the price of the EUR is determined and locked in today
• the value or delivery date, when the local currency is paid and EUR
received, is a date in the future, but specified today
Chapter 16
1. According to the text the critical determinant of the FX value of a currency is:
A. relative inflation
rates.
B. relative income
levels.
C. central bank intervention.
D. exchange rate expectations.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 16.1 Explain how factors that affect the demand for a currency, or the supply of a currency, affect
the determination of an equilibrium exchange rate.
2. The regime whereby the value of a currency is determined by demand and supply
conditions in the FX markets is called:
A. fixed.
B. floating.
C. pegged.
D. variable
.
Difficulty: Easy
Est time: <1 minute
3. The regime whereby the value of a domestic currency is locked in to a specified multiple
of another country is called:
A. preset
.
B. floating.
C. pegged.
D. permanent.
Difficulty: Easy
Est time: <1 minute
4. The FX rate at the point where the demand and supply curves for a currency intersect is
called a/an:
A. balanced exchange rate.
B. equilibrium exchange
rate.
C. intersection exchange
rate.
D. stable exchange
rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

5. If Japan imports more Australian goods, all else being equal, there will be an increased:
A. Australian demand for yen.
B. Australian demand for dollars.
C. Japanese demand for yen.
D. Japanese demand for dollars.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 16.1 The FX markets and an equilibrium exchange rate

6. If the exchange rate of yen/AUD rises, we should expect Australian exports to Japan to:
A. increase in
quantity.
B. decrease in
quantity.
C. remain the same, but imports from Japan

should increase.
D remain the same, but imports from

. Japan should decrease.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
7. The foreign exchange rate regime used by most international countries is a _____
regime.
A. linke
d
B. crawling
peg
C. manage
d
D. floatin
g
Difficulty: Easy
Est time: <1 minute
8. A rising dollar makes Australian goods:
A. more expensive abroad and increases the volume of Australian

exports.
B. less expensive abroad and increases the volume of

Australian exports.
C less expensive abroad and decreases the

. volume of Australian exports.
D more expensive abroad and
. decreases the volume of Australian
exports.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
9. A falling dollar makes Australian goods:
A. more expensive abroad and increases the volume of Australian

exports.
B. less expensive abroad and increases the volume of

Australian exports.
C less expensive abroad and decreases the

. volume of Australian exports.
D more expensive abroad and
. decreases the volume of Australian
exports.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
10. An increase in demand for a country's _______ will cause its currency to appreciate in
the long run, while an increase in demand for its _______ will cause its currency to
depreciate.
A. exports; exports
B. imports;
imports
C. imports;
exports
D. exports;
imports
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
11. If the demand for _______ goods falls, relative to ______ goods, the domestic currency
will depreciate.
A. foreign;
foreign
B. foreign; domestic
C. domestic;
domestic
D. domestic; foreign
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
12. On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at
AUD 0.94 per USD. If the actual exchange rate is AUD/USD0.90 at AUD 0.90, there
would be excess _____ the dollar and the AUD dollar would _____ in the return to
equilibrium.
A. demand for,
appreciate
B. supply of,
appreciate
C. demand for,
depreciate
D. supply of,
depreciate
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
13. On a foreign exchange diagram of the equilibrium exchange rate, there is equilibrium at
AUD 0.94 per USD. At AUD0.97, there would be excess _____ the dollar and the dollar
would _____ in the return to equilibrium.
A. demand for,
appreciate
B. supply of,
depreciate
C. supply of,
appreciate
D. demand for,
depreciate
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

14. In a floating exchange rate regime, the exchange rate is the equilibrium price of the
currency. Changes in demand for a currency will cause changes in the equilibrium
exchange rate. Which of these statements in relation to the AUD demand curve in the
FX market is incorrect?
A. The purchase of AUD goods, services or assets generates a demand

for AUD.
B A depreciation of the AUD equates to a fall in the price

. of Australian goods, services and assets.
C The demand curve is downward-sloping; as

. the price of the AUD increases the demand for
the AUD also increases.
D A fall in the cost of Australian goods,

. services or assets will result in
increased demand for the AUD.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

15. If the Japanese buy more Australian goods, they _____ more yen and _____ more
dollars in the foreign exchange market.
A. demand,
supply
B. demand,
demand
C. supply,
supply
D. supply,
demand
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

16. When a country's exchange rate appreciates, the price of:
A. that country's goods abroad

decreases.
B. that country's goods abroad increases.
C. foreign goods sold in that country

increases.
D that country's goods produced and

. sold locally increase.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
17. When a country's exchange rate depreciates, the price of:
A. that country's goods abroad

decreases.
B. that country's goods abroad increases.
C. foreign goods sold in that country

increases.
D that country's goods produced and

. sold locally increases.
Difficulty: Medium
Est time: <1 minute
18. If the currency AUD/USD moves from 0.9527-32 to 0.9555-60, there has been:
A. an appreciation of the
USD.
B. appreciation of the
AUD.
C. depreciation of the
AUD.
D. a change in the bid-offer
spread.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
19. If the currency AUD/USD moves from 0.9870-75 to 0.9364, there has been:
A. an appreciation of the
USD.
B. appreciation of the
AUD.
C. a depreciation of the
AUD.
D. a change in the bid-offer

spread.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
20. A change in the Australian dollar value of the British pound from $2.60 to $2.50 means:
A. there has been an increase in the pound price of British goods.
B. the pound has appreciated relative to the Australian

dollar.
C. the Australian dollar has appreciated relative

to the pound.
D. an increase in the dollar price of

British goods.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
21. A change in the Australian dollar value of the British pound from $2.60 to $2.80 means:
A. there has been a decrease in the pound price of British

goods.
B. the pound has appreciated relative to the Australian

dollar.
C. the Australian dollar has depreciated relative

to the pound.
D. an increase in the dollar price of

British goods.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

22. In a floating exchange rate regime, the exchange rate is the equilibrium price of the
currency. Changes in supply for a currency will cause changes in the equilibrium
exchange rate. Which of these statements in relation to the AUD supply curve in the FX
market is incorrect?
A For AUD holders, a rise in the price of foreign exchange means

. foreign currency priced goods, services and assets become cheaper.
B The AUD supply curve is upward-sloping, reflecting the

. demand for foreign currency by AUD holders.
C Supply of AUD onto the FX market rises as

. holders of AUD buy foreign currency.
D As the price of the AUD increases,

. the price of the foreign currency
falls.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

23. All else being equal, a significant appreciation of the Australian dollar is likely to result
in:
A. a reduced demand for Australian goods and layoffs of Australian

workers.
B an increased demand for Australian goods and increased

. employment of Australian workers.
C lower foreign currency prices of Australian

. goods in foreign countries.
D higher Australian dollar prices for

. foreign goods in Australia.
Difficulty: Medium
Est time: <1 minute

24. If the British pound appreciates against the Australian dollar:
A. British businesses gain by a fall in the dollar price of exports to

Australia.
B British consumers gain by a fall in the pound price of

. Australian exports to Britain.
C British consumers lose on account of a rise in

. the pound price of Australian exports to
Britain.
D Australian consumers gain by a fall

. in the dollar price of British exports
to Australia.
Difficulty: Medium
Est time: <1 minute

25. If the price of a local currency declines, then it follows:
A. holders of the local currency will see the price of foreign goods
decrease.
B. it is equivalent to an increase in the price of the foreign

currency.
C. the demand for foreign currency will

decrease.
D there will be a greater quantity of

. local currency supplied to the
market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

26. If the price of a local currency increases, then it follows:
A. holders of the local currency will see the price of foreign goods
increase.
B. It is equivalent to an increase in the price of the foreign

currency.
C. The demand for local currency will

increase.
D There will be an increase in the

. quantity of local currency supplied to
the market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

27. If the Japanese yen depreciates against the Australian dollar:
A. Japanese businesses gain by a rise in the dollar price of exports to

Australia.
B Japanese consumers gain by a fall in the yen price of

. Australian exports to Japan.
C Japanese consumers lose on account of a rise

. in the yen price of Australian exports to Japan.
D Australian consumers lose on

. account of a rise in the dollar price of
Japanese exports to Australia.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

28. If one country is experiencing prolonged lower inflation than another country, the
currency of the first country should, in general, _______ with respect to the currency of
the second country.
A. remain
unchanged
B. appreciate
C. depreciate
D. Impossible to say without values
Difficulty: Easy
Est time: <1 minute
Learning Objective: 16.2 Understand how the major factors that influence exchange rate movements operate.
Section: 16.2 Factors that influence exchange rate movements
29. Consider a textbook situation in which Australia and the USA are experiencing similar
inflation rates. If the rate of inflation were to increase significantly in Australia, relative
to the USA, which of the following impacts would be expected to occur?
A. There would be an increased demand by Australians for US goods

and services.
B Overseas demand for AUD goods would switch to
. relatively cheaper US goods.
C The price of goods and services exported to

. the USA would increase.

correct.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
low rates of inflation. Then if the rate of inflation were to increase significantly in USA,
relative to the Australia, which of the following impacts would be expected to occur?
A. The prices of goods and services in USA would decrease in USD

terms.
B. Australian demand for USA goods and services would

decline.
C There should be an increase in Australian

. demand for the US dollar.
D There would be an increase in the
. supply of AUD in the FX markets.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
low rates of inflation. Then if the rate of inflation were to decrease significantly in USA,
relative to the Australia, which of the following impacts would be expected to occur?
A. The prices of goods and services in USA would increase in USD

terms.
B. Australian demand for USA goods and services would

increase.
C There should be a decrease in Australian

. demand for the US dollar.
D There would be a decrease in the
. supply of AUD in the FX markets.
Difficulty: Medium
Est time: <1 minute
32. If Australia's national income begins to grow quite rapidly and Australia's demand for
German imports grows, then there would be:
A. a decrease of supply of
AUD.
B. an increase of supply of
AUD.
C. a decrease in demand for euros.

D. no change in demand for
AUD.
Difficulty: Medium
Est time: <1 minute
33. If the inflation rate in Australia is higher than that of Italy, and productivity is growing
at a slower rate in Australia than it is in Italy, in the long run:
A. the euro should depreciate, relative to the

dollar.
B. the euro should appreciate, relative to the

dollar.
C. there should be no change in the euro price

of the dollar.
D it is uncertain what will happen to
. the euro price of dollars.
Difficulty: Easy
Est time: <1 minute
34. The relationship between the exchange rate and changes in the relative growth rates in
national income operates through:
A. changes in the real exchange rate.
B. changes in the demand for exports and

imports.
C. variations in the inflation differentials

between countries.
D changes in interest-rate differentials

. between countries.
Difficulty: Medium
Est time: <1 minute
35. It may be argued that a factor that can affect the equilibrium exchange rate is changes in
relative income growth between countries. If the growth in Australian national income
rises substantially, while that in the USA remains stagnant, which of the following
impacts would you expect to occur?
A. A new equilibrium exchange rate may see the AUD

depreciate.
B The relative strength of import growth and foreign

. investment inflows will impact upon the equilibrium
exchange rate.
C A new equilibrium exchange rate may see

. the AUD appreciate.

correct.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
36. If the rate of growth of Australian national income increases while the rate of growth of
national income in most other countries remains constant, we would expect:
A. prices for foreign goods in Australia to

fall.
B. the Australian dollar to

appreciate.
C. the Australian dollar to

depreciate.
D. prices for Australian goods in

Australia to rise.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

37. If the rate of growth of Australian national income decreases while the rate of growth of
national incomes in most other countries remains constant, we would expect:
A. prices for foreign goods in Australia to

rise.
B. the Australian dollar to

appreciate.
C. the Australian dollar to

depreciate.
D. prices for Australian goods in

Australia to fall.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

38. According to the text, if Australia's national income begins to grow quite rapidly while
the rate of growth in USA remains constant, then:
A. Australian businesses may decide to expand due to increased

growth prospects.
B. foreign funds could be attracted to Australian

equities.
C. there could be an increase in demand for the

AUD.
D. all of the given answers are

correct.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

39. According to the text, if USA's national income begins to grow quite rapidly while the
rate of growth in Australia remains constant, then:
A. Australian businesses may decide to

expand.
B. foreign funds could be attracted to USA

equities.
C. there could be an increase in demand for the

AUD.
D. there could be an increase in

supply of USD.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

40. If German demand for Australian exports increases at the same time as Australian
productivity increases, relative to German productivity, in the long run:
A. the euro should appreciate, relative to the AUD

dollar.
B. the AUD dollar should depreciate, relative to the

euro.
C. the AUD dollar should appreciate, relative

to the euro.
D it is uncertain whether the euro

. would appreciate or depreciate,
relative to the AUD dollar.
Difficulty: Medium
Est time: <1 minute

41. If US interest rates fall, relative to those in Australia, this will tend to _______ net
lending by the Americans to Australia and may ________ the equilibrium exchange rate
of US dollars to the AUD.
A. increase;
increase
B. decrease; decrease
C. increase; decrease
D. decrease; increase
Difficulty: Medium
Est time: <1 minute
42. If the interest rate in Australia rises, overseas investors:
A. increase their demand for Australian dollars and the Australian

exchange rate falls.
B increase their demand for Australian dollars and the
. Australian exchange rate increases.
C decrease their demand for Australian dollars

. and the Australian exchange rate rises.
D decrease their demand for Australian

. dollars and the Australian exchange
rate falls.
Difficulty: Medium
Est time: <1 minute
43. If the interest rate in Australia falls, overseas investors:
A. increase their demand for Australian dollars and the Australian

exchange rate falls.
B increase their demand for Australian dollars and the

. Australian exchange rate increases.
C decrease their demand for Australian dollars

. and the Australian exchange rate rises.
D decrease their demand for Australian
. dollars and the Australian exchange
rate falls.
Difficulty: Medium
Est time: <1 minute
44. If foreign interest rates increase relative to Australian rates, the demand for domestic
currency:
A. falls, causing it to
appreciate.
B. rises, causing it to appreciate.
C. rises, causing it to depreciate.
D. falls, causing it to
depreciate.
Difficulty: Medium
Est time: <1 minute
45. If foreign interest rates decrease relative to Australian rates, the demand for domestic
currency:
A. falls, causing it to
appreciate.
B. rises, causing it to appreciate.
C. rises, causing it to depreciate.
D. falls, causing it to
depreciate.
Difficulty: Medium
Est time: <1 minute

46. If currency traders are anticipating a currency's foreign exchange value to fall, the:
A. current foreign exchange value of the currency will increase.
B. current foreign exchange value of the currency will

decrease.
C. demand for the currency will rise in

anticipation.
D. country's nominal interest rate will

rise.
Difficulty: Easy
Est time: <1 minute
47. If currency traders are anticipating a currency's foreign exchange value to increase, the:
A. current foreign exchange value of the currency will

decrease.
B. current foreign exchange value of the currency will
increase.
C. demand for the currency will fall in

anticipation.
D. country's nominal interest rate will

fall.
Difficulty: Easy
Est time: <1 minute
48. If foreign exchange traders become certain that the value of the yen will rise against the
Australian dollar in the future, the likely result is that the:
A. demand for yen will fall in

anticipation.
B. current value of the yen against the Australian dollar

will fall.
C current value of the yen against the

. Australian dollar will rise.
D. nominal rates in Japan will
fall.
Difficulty: Easy
Est time: <1 minute
49. Relative interest rate levels between countries is a determinant that will, from time to
time, impact upon the equilibrium exchange rate. When considering the impact of
relative interest rate differentials, which of the following is incorrect?
A If an increase in the interest rate is a result of an increase in

. inflationary expectations, all else being constant, the currency will
appreciate.
B If an increase in the interest rate is due to an increase in

. the real rate of interest, all else being constant, the
currency will depreciate.
C Interest rate differentials must be viewed

. together with expected percentage changes in
exchange rates over the period.
correct.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
50. A depreciating nominal foreign exchange rate may arise from a/an:
A. low domestic inflation rate, relative to the foreign inflation

rate.
B. depreciating real foreign exchange

rate.
C. appreciating real foreign exchange

rate.
D small Australian Commonwealth
. government budget deficit.
Difficulty: Medium
Est time: <1 minute
51. Exchange rate expectations may play an important role in the determination of an
equilibrium exchange rate. Given that a very high percentage of turnover in the
Australian FX market is not associated with payments for imports and exports, what
would you expect to happen if speculators believed that the AUD was about to
depreciate?
A. Funds would be moved offshore in anticipation of the expected

depreciation.
B There would be increased demand for the AUD as

. transactions are brought forward before the expected
depreciation occurs.
C The AUD supply curve would move to the

. left, reflecting the reduced supply of AUD.
correct.
Difficulty: Medium
Est time: <1 minute
52. All else being constant, a currency should _______ if there is _______ in the real rates
of return, relative to those in other countries.
A. depreciate; no
change
B. depreciate; an
increase
C. appreciate; a decrease
D. appreciate; an
increase
Difficulty: Medium
Est time: <1 minute
53. All else being constant, a currency should _______ if there is _______ in a country's
inflationary expectations, relative to those in other countries.
A. depreciate; an
increase
B. depreciate; a decline
C. appreciate;
increase
D. appreciate; no
change
Difficulty: Medium
Est time: <1 minute
54. A central bank may seek to influence its country's currency by:
A. imposing limits on the number of goods that may be imported.
B. restricting the outflow of funds from the home

country.
C. intervening directly in the FX market to

support the currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

55. When a central bank takes action to offset or reduce any volatility in the currency, this is
called:
A. FX
smoothing.
B. risk-hedging monetary
operations.
C. reserve
nullification.
D. reserve management
strategy.
Difficulty: Medium
Est time: <1 minute

56. In international trade flows, an embargo is:
A. a charge levied on
imports.
B. a government restriction on
imports.
C. a prohibition on imports of goods and

services.
D. a tax levied on
imports.
Difficulty: Medium
Est time: <1 minute
57. When a government prohibits exports or imports of specified goods this is called a/an:
A. quota.
B. embargo.
C. entry
tax.
D. tariff.
Difficulty: Medium
Est time: <1 minute
58. A government restriction that places a direct limit on the amount of particular goods that
can be imported into a country is called a/an:
A. entry
limit.
B. embargo.
C. quota.
D. tariff.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
59. A tax levied on imports into a country is called a:
A. quota.
B. embargo.
C. value added tax.
D. tariff.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

60. A tariff is a:
A. tax on goods exported to other

countries.
B. tax on goods purchased from other

countries.
C. limit on the number of goods that may be

imported.
D subsidy by governments granted to

. exporting companies.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
61. A quota is a:
A. prohibition on the import of specified goods.

B. government restriction on how much may be charged
for imported goods.
C government restriction on the amount of a

. specified good that may be imported.
D subsidy by governments granted to

. importing companies.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
62. If Australia puts a quota on the importing of cars, the:
A. Australian dollar will rise.
B. Australian dollar will

fall.
C. price of Australian-made cars will

fall.
D efficiency of the Australian
. economy will be improved.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
63. If Australia puts a tariff on the importing of cars, the:
A. price of Australian cars will

fall.
B. Australian dollar will

fall.
C. Australian dollar will rise.
D price of foreign-produced cars sold

. in Australia will fall.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
64. In the _______ run, higher quotas and tariffs cause a country's currency to _______.
A. short;
depreciate
B. short;
appreciate
C. long;
depreciate
D. long;
appreciate
Difficulty: Medium
Est time: <1 minute

65. In the _______ run, lower quotas and tariffs cause a country's currency to _______.
A. short;
depreciate
B. short;
appreciate
C. long;
depreciate
D. long;
appreciate
Difficulty: Medium
Est time: <1 minute

66. In addition to economic variables, intervention of the government in the FX market may
affect the equilibrium exchange rate. Which of the following interventions does the
Australian government continue to pursue?
A. Increased tariff protection in the car industry and textile, clothing

and footwear industries.
B Implementing tougher foreign investment guidelines,

. imposed by the Foreign Investment Review Board.
C Active participation in the FX market to

. maintain the AUD exchange rate within a
target exchange rate band published in the
Reserve Bank Bulletin.

answers.
Difficulty: Medium
Est time: <1 minute

67. In relation to the international FX markets before 1973:
A. the majority of countries followed a floating peg

regime.
B. the majority of countries followed a fixed exchange

rate system.
C. exchange rates were floating against the US

dollar.
D most countries followed a managed

. floating exchange rate regime.
Difficulty: Medium
Est time: <1 minute
68. In the long run, foreign exchange rates are determined by:
A. an agreement between governments of the major industrial

countries.
B economic fundamentals, such as productivity levels or
. price levels in different countries.
C the difference between the short-term and

. long-term interest rates in each country.
D the rate at which each country's

. currency can be exchanged for gold.
Difficulty: Easy
Est time: <1 minute
69. Which of the following statements regarding the floating exchange rate regime adopted
by Australia in December 1983 is incorrect?
A When the Reserve Bank sells foreign exchange, its intention may be
. to depress the price of the foreign currency and support the AUD.
B Increased demand for the AUD by foreign investors will

. lead to an appreciation of the AUD and therefore an
increase in the domestic money supply.
C When the Reserve Bank buys foreign

. currency, the intervention may be aimed at
pushing up the price of foreign currency,
resulting in a depreciation of the AUD.
D A balance of payments surplus would

. lead to an appreciation of the AUD
and a reduction in the quantity of
foreign currency supplied to the
market.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
70. For a country, a fully floating currency regime:
A. allows a government to remove most restrictions on investment

flows.
B relieves the central bank of the need to maintain a

. particular fixed value of the currency in the FX markets.
C does not require a country to maintain large

. amounts of FX reserves to support the
currency.
correct.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
71. Foreign exchange rates are affected by:
A. financial flows.
B. trade flows.
C. government intervention.
D. All of the given answers.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
72. All of the following factors are likely to influence exchange rates, except:
A. financial flows.
B. trade flows.
C. government intervention.
D an increase in the number of dealers

. of foreign exchange.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

i. There is conclusive evidence that an increase in national output growth and income
will result in an immediate and sustained appreciation of the exchange rate.
ii. There is no relationship between interest rates and exchange rate, because interest
rates reflect the current yield on financial assets, whereas exchange rates are the relative
prices of different currencies.
iii. All else being constant, it is to be expected that a currency will appreciate if there is
an increase in real rates of return, relative to those in other countries.
iv. Movements in commodity prices within Australia typically provide a reasonable

indicator of AUD/USD exchange rate movements.
v. As Australia maintains a fixed exchange rate, tied to the USD, there is no need for the
Reserve Bank to intervene in the FX market.
C. 4 statements are true and 1 is

false
D. 1 statement is true and 4 are

false
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
74. The theory of purchasing power parity seeks to explain how exchange rates are
determined in the:
A. short
run.
B. long
run.
C. short run and long run.
D. none of the given answers are

correct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

75. The theory of purchasing power parity asserts that exchange rates between any two
countries will adjust to reflect changes in:
A. the current account balances of the two

countries.
B. the trade balances of the two

countries.
C. monetary policies of the two

countries.
D. the price levels of the two

countries.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

76. One important view of the determination of the foreign exchange value of a currency is
given in the purchasing power parity theory. The theory states, in effect, that:
A. any national currency should have equal buying power, given

current exchange rates.
B although prices in one country may rise faster than in

. another, parity is maintained.
C lower prices in one country are offset by a

. depreciation of the currency in another
country.

correct.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

77. Under the theory of purchasing power parity, an increase in the Australian price level of
5%, relative to the Japanese price level, should result in a:
A. 5% rise in the Australian

dollar.
B. 5% rise in the Japanese

yen.
C rise in the yen by an amount depending on

. what happens to the real exchange rate.
D rise in the Australian dollar by an

. amount depending on what happens
to the real exchange rate.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

78. In the long run, if purchasing power parity (PPP) is maintained, a rise in a country's
price level (relative to the foreign price level) should cause its currency to _______,
while a fall in the country's relative price should cause its currency to _______.
A. appreciate; appreciate
B. appreciate; depreciate
C. depreciate; appreciate
D. depreciate; depreciate
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
79. If the regression analysis of the relationship between exchange rates and changes in the
factor inflation has the coefficient 0.85, this suggests:
A. a negative relationship between the exchange rate and

inflation.
B. that the theory of purchasing power parity (PPP) does
not hold.
C. positive support for the theory of

PPP.
D. that the relationship is not

clear.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 16.3 Explore regression analysis as a statistical technique applied to variables that impact on an
exchange rate.
Section: 16.3 Measuring exchange rate sensitivity to changes in economic variables
80. The Indonesian economy is predicted to average 64% per annum inflation over the next
two years. If the forecast inflation for Australia over the same period is 2.5% per annum,
how much will a rupiah cost you in two years' time if the current exchange rate is
$0.1293/rupiah and PPP is maintained?
A. $0.050
5
B. $0.080
8
C. $0.331
0
D. $0.206
9
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 16.4 Apply purchasing power parity concepts and calculations to the determination of foreign
exchange risk measurement.
81. Two identical items are manufactured in both Australia and the USA. Using your
knowledge of the purchasing power parity theory and the following data, forecast the
AUD/USD exchange rate in years 2 and 3.
Price (AUD) Price (USD) AUD/USD
Year 1 $17.50 $13.60 0.7680
Year 2 $19.25 $14.28 ?
Year 3 $19.25 $14.99 ?

A. 0.7296 and
0.7661
B. 0.8064 and
0.7661
C. 0.8064 and
0.8467
D. 0.8448 and
0.8870
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
82. Research into the purchasing power parity theory may well identify a number of issues
relating to the theory. Using your knowledge of the theory, which of the following is
correct?
A. The theory is most effective in explaining short-term exchange rate

movements.
B PPP theory incorporates a broad range of variables that
. act as determinants of an exchange rate.
C It assumes that residents in a higher-inflation

. country can easily find product substitutes in
another country with lower inflation.

correct.
Difficulty: Medium
Est time: <1 minute
83. A demand curve for a local currency slopes downward as the higher the price of the
local currency the less demand there would be for it.
TRUE
It is reasonable to expect FX participants would act in this manner.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. Increased demand for a country's exports causes its currency to depreciate.
FALSE
In order to pay for the country's exports the local currency needs to be bought, so
pushing the price up.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
85. In determining the equilibrium exchange rate, the supply curve is upward sloping,
representing an increase in supply of the local currency when the price of the local
currency increases in the FX markets relative to the foreign currencies.
TRUE
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
86. When there is a shortage of currency in the FX markets dealers will bid the price and the
quantity of currency would increase.
TRUE
The forces of supply and demand work to restore equilibrium.
Difficulty: Easy
Est time: <1 minute

87. With the USD/AUD currency pair, an increase in the demand for the USD is equivalent
to an increase in the supply of AUD in the FX markets and would result in the supply
curve moving upwards and to the right.
TRUE
Supply curves move to the right for an increase.
Difficulty: Medium
Est time: <1 minute
88. A decrease in inflation in the USA relative to that in another country could be expected
to result in increased demand for goods from the USA and the demand curve would
move to the right.
TRUE
Residents from the other country will buy the cheaper US goods and so sell their own
currency.
Difficulty: Medium
Est time: <1 minute
89. If the inflation rate in one country is higher than that of Australia and productivity is
growing at a slower rate in that country relative to Australia, that country's foreign
currency should appreciate, relative to the Australian dollar.
TRUE
Relative inflation rates as well as productivity are factors in foreign exchange rates.
Difficulty: Easy
Est time: <1 minute

90. If the interest rate in Australia rises relative to the rest of the world, it is likely foreign
investors would decrease their demand for Australian dollars and the Australian foreign
exchange rate would rise.
FALSE
It is more likely that foreign investors would increase their demand for Australian
dollars and that the Australian foreign exchange rate would rise.
Difficulty: Easy
Est time: <1 minute
91. When a government places a direct limit on goods that may be imported, this
intervention is called a tariff.
FALSE
A direct limit on goods that may be imported is called a quota.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

92. Under a floating exchange rate regime, central banks may still intervene in the FX
market to stabilise volatility in the value of the currency.
TRUE
After inexplicable increases or decreases in the currency, the central bank tries to
smooth the FX currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
93. Discuss how relative inflation rates may influence exchange rates.
Differential inflation rates will influence exchange rates as illustrated in the following
example. Consider what will happen to US demand for euros and the supply of euros for
sale if US inflation suddenly becomes much higher than European inflation. The US
demand for European goods will increase, reflecting the increased US demand for euros.
As well, the supply of euros to be sold for US dollars will decline as the European desire
for US goods decreases as the US goods are dearer. Both forces will place upward
pressure on the value of the euro. In the reverse situation, where European inflation
becomes higher, the result is downward pressure on the value of the euro.
Bloom's: Knowledge
94. Discuss how relative national income growth may influence exchange rates.
A possible mechanism is if a country's national income increases substantially in

relation to another, say Australia in relation to US. If Australia's demand for imports
from the US increases, to pay for the imports there would be an increase in the supply of
AUD on the FX markets. If US income growth remained unchanged, the demand for the
AUD would remain at the same level and so the AUD would depreciate. On the other
hand, if there is foreign investment inflows owing to the higher prospects of economic
growth this could lead to an appreciation of the AUD.
Bloom's: Synthesis
95. Discuss how relative interest rates may influence exchange rates.
Interest rates affect exchange rates by influencing the capital flows between countries.
Consider if Australian interest rates rise while those in the US remain relatively stable.
Demand for Australian interest bearing securities increases and as US investors increase
their purchases of Australian securities, the supply of US dollars to be sold in exchange
for AU dollars increases. So both forces put an upward pressure on the AUD. In general,
the currency of the country with the higher (or smaller decrease in) interest rates is
expected to appreciate, other factors held constant. However, investors need to consider
what may happen to interest rates over the time of their investment if there is a change in
the real rate of return or inflationary expectations.
Bloom's: Synthesis
96. Discuss how a central bank or government may directly intervene in the FX markets.
A central bank may intervene to dampen volatility in the currency, sometimes referred to
as an FX smoothing. This may happen if the bank perceives speculators are dominating
the currency and are causing volatility not justified by the economic fundamentals.
When sell orders are swamping the currency market the central bank may enter the
market as a buyer of the local currency. Second, a central bank may intervene to try to
achieve an exchange rate target value that is different from the market's perception of
the value of the currency.
Bloom's: Knowledge
97. If a regression analysis was run for the AUD/USD exchange rate and obtained the
following coefficients, a1 = 0.8 for (IUS -IA), a2 = 0.5 for (YUS - YA) and a3 = 0.6
for (iUS -iA), explain the meaning of the coefficients.
The coefficient a1 = 0.8 suggests that a one-unit change in the inflation differential is
associated with a 0.8% change in the value of the AUD.
a2 = 0.5 suggests a positive coefficient between the income growth differential and the
value of the AUD.
For a3 = 0.6 the sign suggests a positive relationship between the value of the AUD and
the interest rate differential, possibly as a result of changes in inflationary expectations.
Chapter 17
1. Foreign exchange risk refers to the risk that arises from:
A. the fixed exchange rate between two currencies.
B. the variable exchange rate between two currencies.
C. tax changes in a foreign country where a multinational

corporation operates.
D the potential nationalisation of a multinational corporation's

. operations by a foreign government.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.1 Recognise FX transaction, translation, operational and economic risk exposures and formulate an FX policy
document including FX objectives, management structure, authorisations, reporting systems, communications, performance evaluation,
audit and review procedures.
2. Companies that compete in an international marketplace may be faced with three
types of risk owing to foreign exchange. These are:
A. specific, translation and transaction risk.
B. translation, transaction and economic

risk.
C. accounting, transaction and translation

risk.
D. accounting, specific and transaction

risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Which of the following represents a source of foreign exchange risk exposure?
A. Economic exposure
B. Transaction
exposure
C. Translation
exposure
D. All of the given choices
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. _______ is the risk that arises from the effects of foreign exchange rates on the
translated value of a corporation's accounts, denominated in a given foreign
currency.
A. Accounting
exposure
B. Economic exposure
C. Macro-political risk
D. Micro-political risk
Difficulty: Medium
Est time: <1 minute
5. _______ is the risk that changes in the foreign exchange rate will affect future
ongoing revenues and costs for a company.
A. Accounting
exposure
C. Operating exposure
D. Translation
exposure
Difficulty: Easy
Est time: <1 minute
6. _______ is the risk that arises from the effects of unexpected fluctuations in
foreign exchange rates on the net present value of a corporation's future cash flows.
A. Accounting
exposure
D. Micro-political risk
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
7. The risk for a company that future foreign currency denominated cash flows will
vary owing to exchange rate movements is:
A. accounting exposure.
B. economic exposure.
C. transaction exposure.
D. translation
exposure.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
8. When a company has entered into a contract denominated in yen to buy cars from
Japan, it faces:
C. operating
exposure.
D. transaction exposure.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. If a company has overseas assets and at a future date must represent these assets on
its balance sheet, it faces ______ when doing so.
A. transaction exposure
B. economic exposure
C. operating
exposure
D. translation
exposure
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
10. Transaction exposure measures the changes in the value of contractually binding
outstanding foreign-currency obligations:
A. acquired after exchange rate

changes.
B. acquired before exchange rate changes.
C. realised before the outstanding obligation is

settled.
D. that must be settled before economic exposure is established.
Difficulty: Medium
Est time: <1 minute
11. Transaction exposure:
A. measures the extent to which foreign exchange volatility may affect a

firm's future ongoing revenues and costs.
B. measures the effects of FX changes on the balance sheet of the

firm.
C refers to the extent to which the value of the firm's cash flows
. may be affected by changes in the exchange rate.
D tries to measure the impact of unexpected exchange rate

. fluctuations on the net present value of the firm's future cash
flows.
Difficulty: Medium
Est time: <1 minute
12. Operating exposure:
A. measures the extent to which foreign exchange volatility may affect a

firm's future ongoing revenues and costs.
B. measures the effects of FX changes on the balance sheet of the

firm.
C refers to the extent to which the value of the firm's cash flows
. may be affected by changes in the exchange rate.
D tries to measure the impact of unexpected exchange rate

. fluctuations on the net present value of the firm's future cash
flows.
Difficulty: Medium
Est time: <1 minute
13. An Australian tourist, who is planning a trip to Germany and anticipates a change
in exchange rates, faces what kind of FX risk?
B. Foreign exposure
C. Translation
exposure
D. Transaction
exposure
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. When a foreign subsidiary's assets are _______ than its liabilities, if the foreign
currency value depreciates for the country in which the foreign subsidiary operates,
_______ will occur.
A. greater; currency exchange gains
B. greater; currency exchange

losses
C. less;
nothing
D. greater; nothing
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. When a foreign subsidiary's assets are _______ than its liabilities, if the foreign
currency value appreciates for the country in which the foreign subsidiary operates,
_______ will occur.
A. greater; currency exchange gains
B. greater; currency exchange

losses
C. less;
nothing
D. greater; nothing
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
16. When a company with a foreign subsidiary needs to arrange funding in a foreign
currency to pay its foreign employees, it faces:
C. operating
exposure.
D. translation
exposure.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
17. _______ is the risk that arises from the effects of foreign exchange rates on the
foreign cash flows of a corporation's financial accounts, denominated in a given
foreign currency.
B. Competitive exposure
D. Transaction
exposure
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
18. Which of the following does NOT relate to a transaction exposure being
undertaken by a company?
A. A contract denominated in US dollars to purchase US

goods
B. Borrowing yen from a Japanese bank
C The incorporation of a New Zealand subsidiary onto the

. Australian parent company balance sheet
D. Selling Australian goods to

Germany
Difficulty: Easy
Est time: <1 minute
19. Which of the following does NOT relate to an operating exposure for a company
with a large foreign subsidiary in Japan?
A. Payment of its Japanese employees
B. Borrowing yen from a Japanese bank
C The incorporation of a Japanese subsidiary onto the Australian

. parent company balance sheet
D. Payment of its day-to-day operations in

Japan
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
20. Which of the following describes the difference between transaction exposure and
translation exposure?
A. Translation exposure derives from a company's foreign-currency-

denominated cash flows, and transaction exposure derives from the
foreign assets and liabilities being consolidated onto the parent company's
financial statements.
B. Transaction exposure derives from a company's foreign-currency-

denominated cash flows, and translation exposure derives from the
foreign assets and liabilities being consolidated onto the parent
company's financial statements.
C Translation exposure derives from a company's forward exchange

. contracts, and transaction exposure derives from the foreign
assets and liabilities being consolidated onto the parent company's
financial statements.
D Translation exposure derives from a company's foreign-

. currency-denominated cash flows, and transaction exposure
derives from the company's forward exchange contracts.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
21. Transaction exposure and operating exposure differ in that transaction exposure:
A. derives from a company's foreign-currency-denominated cash flows, and

operating exposure applies to the impact of exchange rate volatility on the
value of the assets and liabilities of a company's foreign operations.
B. derives from a company's foreign-currency-denominated cash flows,

and operating exposure applies to the impact of exchange rate
volatility on future cash flows.
C derives from a company's foreign-currency-denominated cash

. flows, and operating exposure applies to the impact of exchange
rate volatility on foreign operations.
D applies to the impact of exchange rate volatility on future cash

. flows, and operating exposure applies to the impact of
exchange rate volatility on foreign operations.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
22. An Australian company with subsidiary operations in a number of international
markets has an audit into its financial risk exposures that reveals it has a potential
exposure to translation risk. Which of the following statements relates to its
translation risk exposure?
A. The company has export contracts written in USD receipts over the next
twelve months.
B. Interest repayments on euromarket funding are payable in DEM.
C Assets and liabilities of its subsidiary companies are denominated

. in foreign currencies.

correct.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
23. An Australian company is preparing to export beer into the lucrative German
market in direct competition with the established local brewers. There is some
concern within the company that it is exposed to foreign exchange risk. To which
type of foreign exchange risk is the company initially exposed?
A. Transaction risk
exposure
B. Sovereign risk exposure
C. Translation risk
exposure
D. Economic risk exposure
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
24. In relation to potential FX exposures, historical data suggests to manage FX
exposures:
A. all importers, exporters, lenders and borrowers in capital markets tend to

use currency futures contracts and cross-currency swaps.
B. in commercial trade transactions importers and exporters use currency

futures contracts and in capital market transactions lenders and
borrowers use forward exchange contracts.
C in commercial trade transactions importers and exporters typically

. use forward exchange contracts and currency options while in
capital markets transactions lenders and borrowers tend to use
currency futures contracts and cross-currency swaps.
D All importers and exporters in trade as well as lenders and

. borrowers in capital market transactions tend to use forward
exchange contracts and currency options.
Difficulty: Easy
Est time: <1 minute
25. When a company analyses and forecasts foreign exchange movements and then
applies strategies based on this, this strategy is called:
A. active
.
B. defensive
.
C. forward.
D. protective.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 17.1 Foreign exchange risk policy formulation

26. Which of the following about foreign exchange objectives for a large company is
incorrect?
A. An FX strategy that requires a company to hedge a defined percentage of

its identified FX exposures at all times is called a defensive strategy.
B. A company document should state whether it will have a centralised

or decentralised FX operation.
C. A firms' FX function is part of the organisation's treasury

division.
D Strategies that require a company to analyse and forecast

. movements in FX markets and then apply based on its
forecasts are called hedging strategies.
Difficulty: Easy
Est time: <1 minute

27. The part of a company that is responsible for balance sheet funding, managing cash
flows and financial risk management is the:
A. accounting and reporting division.
B. management and audit

division.
C. treasury
division.
D. tax management division.
Difficulty: Easy
Est time: <1 minute

28. When a company has an open FX position, this means:
A. it has a large amount of FX

accounts.
B. it has just received a large FX account

payable.
C. it has a USD account receivable and a USD account payable.
D. the net value of FX buys and sell transactions is yet to be

settled.
Difficulty: Easy
Est time: <1 minute

29. In order to have specific policies in relation to FX management which part of the
company needs to establish FX policies?
A. Accounting and reporting division
B. Management and audit

division
C. The manager of the treasury division
D. The board of directors
Difficulty: Easy
Est time: <1 minute

30. According to the text, which person(s) in the company is responsible to ensure that
operational procedures concerned with FX management are developed?
A. Manager of accounting and reporting division
B. Manager of management and audit division
C. Manager of treasury
division
D. The chief
executive
Difficulty: Easy
Est time: <1 minute

31. A company that is preparing a report on its current net cash-flow exposures to
foreign exchange risk is only concerned with its net foreign currency cash
exposure. Which of the following items are necessary for the report?
i. Timing of each transaction
ii. Amount of each receivable and payable
iii. Country of origin of foreign cash flow
iv. Currency of each transaction
A. i, ii, iii
B. i, ii, iv
C. i, iii,
iv
D. ii, iii, iv
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

32. A company is about to implement its new foreign exchange risk management
strategy. Which of the following controls should the company have in place before
it actually implements the strategy?
A. Daily and other periodic foreign currency exposure

reports
B. Foreign exchange exposure limits by currency and

country
C. Foreign exchange strategy reporting and review

process
D. All of the given

answers
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

33. A company is reviewing the function of foreign exchange within its treasury
division. Which one of the following is NOT one of the ‘controls' the company
should have in place for the FX function?
A. There should be specified monetary limits for single transactions.
B. Authorisations should be required for FX products.
C Only nominated FX dealers can carry out the tasks of

. confirmation, settlement and reconciliation.
D. Periodic reports should be forwarded to a nominated

manager.
Difficulty: Easy
Est time: <1 minute

34. A company is reviewing the function of foreign exchange within its treasury
division. Which one of the following is NOT one of the ‘controls' the company
should have in place for the FX function?
A. There should be specified monetary limits for single transactions.
B. Authorisations should be required for FX products.
C The tasks of dealing, back office, technology support,

. administration and audit should be segregated.
D The net value of outstanding FX buys and sell transactions yet

. to be settled is called an exception report.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

35. A decentralised FX operation is where:
A. the control of Treasury policy development and FX trading is spread

equally between the directors of the company.
B. Treasury policy and FX trading is spread between the divisions of the

company.
C Treasury policy development and FX trading is associated with

. several regional offices.
D Treasury policy development is associated with the head

. office of the company, and FX trading is spread between
several regional offices.
Difficulty: Easy
Est time: <1 minute

36. A centralised FX operation is where:
A. the control of Treasury policy development and FX trading is spread

equally between the directors of the company.
B. Treasury policy and FX trading is spread between the divisions of the

company.
C Treasury policy development and FX trading is associated with

. several regional offices.
D. for a company all FX transactions occur in one single

location.
Difficulty: Easy
Est time: <1 minute

37. For a large multinational company the FX dealers:
A. are generally located in the FX dealing room.
B. must not be allowed to carry out back office tasks of confirmation,

settlements or reconciliation.
C must take into account the foreign currency limit that they are
. authorised to trade in.
D. all the given choices are correct.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

38. A US-based company that is exporting car components into Australia is about to
complete an export order and expects to receive payment of AUD 500 000 in three
months' time. The spot exchange rate is USD/AUD 1.5380. In conducting an
analysis of its foreign exchange risk exposure, the company considers the impact of
the following exchange rate changes:
i. USD/AUD 1.5180
ii. USD/AUD 1.5280
iii. USD/AUD 1.5480
Which of the exchange rate scenarios represents foreign exchange risk to the
company?
A. i
B. ii
C. ii
i

correct
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 17.2 Outline methods that can be employed to measure a company's FX transaction exposures, including net FX
cash flows, currency standard deviations and correlation coefficients.
Section: 17.2 Measuring transaction exposure

39. In examining its need to cover its exposures to foreign exchange risk, a company
obtains current data on the correlation between various currencies to which it is
exposed. The company determines that its main currency exposures are to the USD
and the JPY. These currencies have a correlation coefficient of +0.96. Based on the
spot rate for each of the currencies, the company expects USD cash inflows
equivalent to AUD 500 000, and JPY cash inflows equivalent to AUD 495 000.
Which of the following statements is most correct?
A. High positive correlation between USD and JPY (hedge risk

exposure)
B. High positive correlation between USD and JPY (little need to hedge
risk) exposure
C. High positive correlation between USD and AUD (hedge risk

exposure)
D Low negative correlation between USD and AUD (no need to

. hedge risk exposure)
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

i. ‘Transaction exposure' refers to the risk that in the long run a company's net
present value may be affected by future changes in the foreign exchange rate.
ii. Foreign exchange ‘economic' risk exposure is a measure of the effect that a
change in the exchange rate will have on the value of a company's worth.
iii. Foreign exchange risk implies that every change in the exchange rate will have
detrimental effects on the home currency value of a company's foreign currency
assets, liabilities and transactions.
iv. A company's board of directors is responsible for establishing policy in relation

to the measurement and management of FX risk exposures within the company.
v. If an Australian-based company has a USD 1 million payable and a USD 1

million receivable, both due on 1 July next year, it is not exposed to FX risk.

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
i. ‘Transaction exposure' refers to the risk that in the long run a company's net
present value may be affected by future changes in the foreign exchange rate.
ii. Foreign exchange ‘economic' risk exposure is a measure of the effect that a
change in the exchange rate will have on the value of a company's worth.
iii. Foreign exchange risk implies that every change in the exchange rate will have
detrimental effects on the home currency value of a company's foreign currency
assets, liabilities and transactions.
iv. A company's board of directors is responsible for establishing policy in relation

to the measurement and management of FX risk exposures within the company.
v. If an Australian-based company has a USD 1 million payable and a USD 1

million receivable, both due on 1 July next year, it is not exposed to FX risk.
A. i, ii, iii and iv are true

true
C. i, iii, and iv are true
D. only ii and v are true
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
42. The use of hedging by a company should:
A. increase the variability of reported cash

flows.
B. increase the variability of expected cash flows.
C. decrease the variability of reported cash flows.
D. decrease the variability of expected cash flows.
Difficulty: Medium
Est time: <1 minute
43. The purpose of hedging by a company is to:
A. maximise cash flows and

profits.
B. minimise the variability of expected cash

flows.
C. decrease the uncertainty of reported cash

flows.
D. increase the expected cash flows.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
44. A board of directors is concerned about the variability of the company's various
foreign currency exposures. The company treasurer prepares a report showing the
standard deviations for a range of currencies over the past decade. Which of the
following statements is correct?
A. Standard deviation does not provide an accurate measure of the future

probability of percentage exchange rate changes.
B. Use of ten-year data smooths out periodic fluctuations, to give a more

reliable future indication of exposure.
C Exposures in currencies that have a low standard deviation
. against the AUD involve greater foreign exchange risk.
D Different patterns of future currency movements are reflected

. in the historical data used in calculating standard deviations.
Difficulty: Hard
Est time: <1 minute

45. Consider these five statements:
i. If an Australian-based company has a USD 1 million payable on 1 July next year

and a USD 1 million receivable due on 1 August, the company has a perfect natural
hedge.
ii. An Australian exporter with a transaction denominated in Singapore dollars

(SGD) is exposed to downside risk if the AUD appreciates.
iii. An exposure in a currency with a high standard deviation against the AUD
entails a greater degree of risk than does a similarly sized exposure in a currency
that has a relatively low standard deviation.
iv. If an Australian–based company has net exposures in a range of currencies,

each exposure should be not hedged because each of them involves the same
degree of risk.
v. If an Australian company imports components from Italy, and at the same time
exports goods to Germany, with both contracts under a euro-denominated contract
and dated 31 July next year, the company has no FX exposure.
A. 4 statements are true and 1 is false

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
i. If an Australian-based company has a USD 1 million payable on 1 July next year

and a USD 1 million receivable due on 1 August, the company has a perfect natural
hedge.
ii. An Australian exporter with a transaction denominated in Singapore dollars

(SGD) is exposed to downside risk if the AUD appreciates.
iii. An exposure in a currency with a high standard deviation against the AUD
entails a greater degree of risk than does a similarly sized exposure in a currency
that has a relatively low standard deviation.
iv. If an Australian–based company has net exposures in a range of currencies,

each exposure should be not hedged because each of them involves the same
degree of risk.
v. If an Australian company imports components from Italy, and at the same time
exports goods to Germany, with both contracts under a euro-denominated contract
and dated 31 July next year, the company has no FX exposure.

true
C. ii, iii, and iv are

true
D. ii, iii and v are true
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

47. Market-based hedging techniques for FX include:
A. futures
contracts.
B. options on foreign
currency.
C. currency
swaps.
D. all of the given

choices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.3 Explain procedures involved in the implementation of market-based hedging techniques, in particular forward
exchange contracts and money market hedging.
Section: 17.3 Risk management: market-based hedging techniques

48. The over-the-counter market-based FX instrument that locks in an exchange rate
on a currency pair that will apply at specified future date is:
A. futures
contracts.
currency.
C. forward exchange contracts.
D. currency
swaps.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

49. All of the following are market-based hedging techniques for FX, except:
A. futures
contracts.
currency.
C. forward exchange contracts.
D. currency
swaps.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

50. An Australian company that is exposed to FX risk as the result of having a USD
foreign currency payable due in 3 months can enter into:
A. a 3 month forward exchange contract to sell USD forward.
B. a 3 month forward exchange contract to sell AUD

forward.
C. a 3 month futures contract to sell USD.
D. a 3 month currency swap to sell USD and buy

AUD.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

51. An Australian company that is exposed to FX risk as the result of having a USD
foreign currency receivable due in 3 months can enter into:
A. a 3 month forward exchange contract to sell USD forward.
B. a forward exchange contract to sell AUD

forward.
C. a 3 month futures contract to sell USD.
D. a 3 month currency swap to sell USD and buy

AUD.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

52. The currency risk of an exporter can be reduced by:
A. hedging, using the foreign exchange futures.
B. transacting only in the currency of the exporter's own

country.
C. buying a forward contract for the exporter's

currency.
D. all of the given

choices.
Difficulty: Medium
Est time: <1 minute

53. The general principle of exchange-rate hedging is to:
A. deposit the foreign funds in the local money market until

needed.
B. transact in the foreign money market where the obligation arises.
C. enter into an offsetting obligation in the same foreign

currency.
D. enter into offsetting obligations in the futures and forwards

markets.
Difficulty: Easy
Est time: <1 minute

54. A British company has a USD 1 million payable in two months. How can the
British company hedge the foreign currency payable?
A. Buy pounds in the forward market
B. Sell pounds in the spot

market
C. Sell US dollars in the spot market
D. Buy US dollars in the forward market
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

55. A US company has an AUD 1 million receivable in two months. How can the US
company hedge the foreign currency receivable? It could:
A. buy AUD in the spot

market.
B. sell AUD in the forward

market.
C. sell USD in the spot

market.
D. buy USD in the forward

market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

56. If a company takes out a forward exchange contract, which of the following is
correct?
A. At the maturity date, the company can pay either the forward rate that was
contracted or the then-current rate.
B. Taking out a forward exchange contract is always cheaper than

waiting to pay spot rates.
C. Paying the spot price is safer than taking out a forward exchange
cover.
D The company's cost is locked in from the beginning of the

. contract, regardless of market changes.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

57. A company decides to hedge a foreign exchange risk associated with a USD 1 000
000 receivable by carrying out a money market hedge. Which of the following
statements in relation to the USD receivable money market hedge is correct?
A. Interest rate calculations will need to recognise US convention

differences.
B. The company will borrow sufficient AUD today and spot convert
into USD.
C. USD will be invested in the US money markets for the period of

cover.
Difficulty: Medium
Est time: <1 minute

58. An Australian company that imports goods from a German supplier on credit can
protect itself against transaction exposure risk by:
A. entering into a contract in the forward exchange

market.
B. borrowing Australian dollars and investing in the German money

market.
C. borrowing euros and investing in the Australian money

market.
D entering into a contract in the forward exchange market

. AND/OR borrowing Australian dollars and investing in the
German money market.
Difficulty: Medium
Est time: <1 minute

59. An Australian exporter has despatched a consignment to the USA and expects to
receive payment of USD 250 000 in three months' time. The company wishes to
hedge part of its exposure to the USD, and enters into a forward exchange contract
with its bank, based on the amount USD 125 000. Based on today's data (below),
what amount in AUD will the company receive in three months' time?
Spot rate: AUD/USD 0.7345-50
Three-month forward rate: AUD/USD 0.7430–35
A. AUD 340 136.05
B. AUD 340 367.60
C. AUD 336 473.76
D. AUD 336 247.48
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

60. A system of transactions involving borrowing in one currency and lending in
another in order to construct a pair of future transactions in the two currencies
similar to a forward exchange is a/an:
A. balance sheet hedge.
B. internal
hedge.
C. money market
hedge.
Difficulty: Medium
Est time: <1 minute

61. After assessing the risk of the various exposures, a company decides to take a
money market hedge. The general principle of a money market hedge is to:
A. transact in the money market of the country whose currency you are
exposed to.
B. borrow the home currency and deposit it in the foreign money market
until the future date of the exposed transaction.
C take a position in the home money market today that establishes a

. future obligation that is the opposite of the exposed underlying
transaction.
D. none of the given choices are

correct.
Difficulty: Medium
Est time: <1 minute

62. An Australian company has contracted to buy a piece of machinery produced in
Japan, with delivery in six months and payment to be made in Japanese yen. How
can this company reduce its foreign exchange risk?
A. Go short yen in the futures market
B. Purchase a put option on

yen
C. Sell goods in Japan to be paid in six

months
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

63. A company wishes to obtain a loan denominated in yen but considers the US
market to offer better terms. How can the company accomplish this?
A. Borrow yen in Japan, exchange for US dollars, and arrange a currency

swap
B. Borrow yen in Japan, exchange for US dollars, and arrange an interest

rate swap
C. Borrow dollars in the US, exchange for yen, and arrange a

currency swap
D. Borrow dollars in US, exchange for yen, and arrange an

interest rate swap
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

64. When a company receives a USD 10 million payment for export goods on the same
day as it pays USD 10 million for imports, this is called a/an:
A. dynamic
hedge.
B. passive
hedge.
C. natural hedge.
D. inherent hedge.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 17.4 Consider the implementation of internal hedging techniques to minimise and manage FX risk, including
invoicing in the home currency, creating a natural hedge, currency diversification, leading transactions, lagging transactions, mark-ups,
counter-trade and offsets.
Section: 17.4 Risk management: internal hedging techniques

65. When a company uses the internal foreign exchange hedging technique and
changes the timing of a cash flow so it occurs earlier than the original agreed date,
this is called:
A. currency
diversification.
B. lagging.
C. leading
.
D. advancing.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

66. Which of the following are strategies used to manage transaction exposure?
A. Leading and lagging foreign exchange transactions
B. Buying or selling foreign exchange in the forward market
C Borrowing in foreign currency markets, using foreign currency

. receivables as collateral
D. All of the given

answers
Difficulty: Medium
Est time: <1 minute

67. All of the following are internal hedging techniques for foreign exchange exposure,
except:
A. creating a natural
hedge.
B. using leads and lags in FX transactions.
C. invoicing in the home

currency.
D. using a swap.
Difficulty: Easy
Est time: <1 minute

68. A Singapore-based manufacturing company that exports to a number of overseas
countries, often through its subsidiary companies, is investigating alternative
‘internal' hedging techniques to manage its foreign exchange risk exposures. All of
the following risk management techniques are ‘internal' hedging techniques,
except:
A. creating a natural
hedge.
B. invoicing in foreign currencies.
C. diversification of
currencies.
D. leading and lagging cash

flows.
Difficulty: Medium
Est time: <1 minute

69. Which of the following are commonly used by companies to manage foreign
exchange risk?
A. Money market
hedges
B. Foreign currency
hedges
C. Internal
hedges
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

70. If a company has a EUR 100 000 account payable in three months and it expects
the AUD to appreciate by the time of payment, a reasonable strategy would be to:
A. lag the payment cash

flow.
B. borrow the present value of EUR 100 000 and do a money market
hedge in the Australian market.
C. enter into a forward exchange contract to sell euros in three

months' time.
D. lead the payment cash

flow.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

71. If a company has a YEN 1 000 000 account receivable in three months and it
expects the AUD to depreciate by the time of payment, a reasonable strategy would
be to:
A. lead the payment cash

flow.
B. borrow the present value of YEN 1 000 000 and do a money market
hedge in the Australian market.
C. enter into a forward exchange contract to sell YEN in three

months' time.
D. lag the payment cash

flow.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

A. The majority of trade transactions and international finance transactions

are conducted in hard currencies, such as the USD, euro and sterling.
B. The advantage of diversifying the currency spread of a company's

transactions is enhanced if the foreign currencies have a highly
positive correlation.
C Leading refers to changing the timing of a cash flow so it takes

. place prior to the originally agreed date.
D Counter-trade refers to an arrangement in which two

. companies, each exposed to FX risk, enter into an
arrangement whereby they exchange one product for another.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

i. If an Australian business decides to hedge a USD receivable at time t + 3, it

would hedge through a forward contract in which it sells the AUD forward for t +
3.
ii. An Australian exporter with a USD receivable would be hedging through a

money market hedge if it borrows USD today and repays the loan on the day on
which the USDs are received from the payments of the export account receivable.
iii. If an Australian company borrows through an offshore sale of AUD-

denominated bonds in the eurobond market, it is not exposed to FX risk.
iv. ‘Internal' hedging techniques may save a company the costs incurred in using
'market-based' hedging techniques, but they have recognisable costs as well.
v. A net payable in one currency and a net payable in another currency is a

relatively low-risk set of exposures if the amounts and timing are identical, and the
correlation coefficient between the two currencies is -0.99.

Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
i. If an Australian business decides to hedge a USD receivable at time t + 3, it

would hedge through a forward contract in which it sells the AUD forward for t +
3.
ii. An Australian exporter with a USD receivable would be hedging through a

money market hedge if it borrows USD today and repays the loan on the day on
which the USDs are received from the payments of the export account receivable.
iii. If an Australian company borrows through an offshore sale of AUD-

denominated bonds in the eurobond market, it is not exposed to FX risk.
iv. ‘Internal' hedging techniques may save a company the costs incurred in using
'market-based' hedging techniques, but they have recognisable costs as well.
v. A net payable in one currency and a net payable in another currency is a

relatively low-risk set of exposures if the amounts and timing are identical, and the
correlation coefficient between the two currencies is -0.99.
B. ii, iii, iv and v are

true
C. ii, iii, and iv are
true
D. ii, iii and v are true
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

75. An Australian company borrowing Japanese yen will benefit in which of the
following situations?
A. If the AUD depreciates or the Japanese yen

appreciates
B. If the AUD appreciates or the Japanese yen

depreciates
C. If the AUD and the Japanese yen both

appreciate
D. If the AUD and the Japanese yen both

depreciate
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

76. Which of the following about transaction exposure is NOT correct?
A. An Australian company that exports to Japan faces transaction exposure

for its accounts receivable.
B. If an Australian company exports to the USA but imports other USA

goods for the same value, then it has a natural hedge if the two
payment dates are the same.
C If an Australian company has exposures in two currencies with

. correlation coefficient of 0.96 then the company has a natural
hedge.
D A firm needs to calculate the net amount of cash inflows and

. outflows denominated in different currencies, based on the
timing of cashflows.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

77. Companies that operate in an international market place are faced with different
FX risk exposures. These are accounting, translation and transaction risk.
FALSE
The FX risks are economic, transaction, translation and operational.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
78. Operating FX exposure measures the extent to which exchange rate volatility will
affect future ongoing revenues and costs.
TRUE
Future ongoing revenues and costs are equivalent to the firm's future operating
cash flows.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
79. For a company's treasury FX division it is inappropriate policy to allow an FX

dealer to carry out the backroom tasks of confirmations, settlements, and
reconciliation.
TRUE
There have been many examples of financial loss when FX dealers have been able
to do backroom tasks.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
80. In calculating net FX exposures a company should collate payables and receivables
according to the currency of the transaction rather than the country of the
transaction.
TRUE
It is movements of the different currencies that expose a company to FX risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
81. If a Singaporean-based company has a USD 1 million receivable due on 20 August

and a USD 1 million payable on 20 August, the company has a perfect natural
hedge.
TRUE
Since the receivables and payables are the same and due at the same time any
movement in the currencies would be offset.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
82. An exposure to a currency with a lower standard deviation against an importer's

local currency results in a lower degree of risk than exposure to a currency that has
a higher standard deviation.
TRUE
A lower standard deviation means lower volatility of the currency.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

83. When one currency is appreciating in equal but opposite amounts to another
currency, the two currencies are said to be perfectly negatively correlated.
TRUE
A correlation coefficient of -1.0 indicates the two currencies are perfectly

negatively correlated.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. If an Australian company has a GBP 1 million receivable, due in three months, and
takes out a forward exchange contract to hedge, it enters into a contract to buy
GBP 1 million in three months' time.
FALSE
The company should enter into a forward to sell GBP and buy AUD.
Difficulty: Easy
Est time: <1 minute
85. An Australian importer with a USD payable in three months would be hedging
through a money-market hedge if it borrows AUD today, invests the funds in the
US money market for three months and then pays the account payable with the
maturing money market funds.
TRUE
By using a money market hedge the Australian company knows the AUD cost of
its USD account payable.
Difficulty: Medium
Est time: <1 minute

86. A commonly used strategy by Australian exporters for managing FX risk exposure
is the practice of invoicing in the home currency.
FALSE
It is not a common practice. Majority of trade transactions are conducted in hard

currencies such as USD, the euro or yen.
Difficulty: Medium
Est time: <1 minute
87. In relation to foreign exchange risk policy formulation and the policy document,
discuss the FX objectives of an organisation.
It is the role of the board of directors to establish the objectives and policies of an
organisation. As part of a company's operations FX policies should be documented
and circulated. Some aspects of FX risk management that need to be considered
are: foreign exchange objectives and FX procedures such as management structure.
Bloom's: Knowledge
88. In relation to foreign exchange risk policy formulation and the policy document,
discuss the role of the management structure of an organisation.
The board of directors must ensure a suitable risk management structure is in place
that has expertise in the FX markets. If the FX exposure is large enough to be part
of treasury operations, after allocating funds to ensure personnel are appointed and
infrastructure established, operating procedures such as authorisations, exposure
reporting systems, communications, performance evaluation and audit and review
procedures need to be in place.
Bloom's: Knowledge

89. The policy document that governs FX management should specify how
communication should occur across the organisation structure. Discuss this
statement.
Given all the different units that can occur in a large organisation it is important
that the policy document specifies how FX communication should be handled. For
example, it is important if one unit of an organisation carries out a transaction
involving the provision or receipt of foreign currency for the FX division to be
informed so that financial arrangements can be made on the due date in relation to
the payment or receipt of the FX.
90. Discuss transaction exposure for a firm with only one or two international
transactions.
For such a company, identification of its potential FX exposure is quite simple.

However, it can still face uncertainty. In the case of an Australian exporter with an
order worth USD1 million and paid in USD, if the AUD appreciates, the payment
for its export order is reduced and if the AUD depreciates it may make an
unexpected AUD gain on the transaction. This illustrates how FX exposure makes
accurate budgeting very difficult.
Bloom's: Knowledge
Est time: <1 minute
91. Discuss the importance of the recording of the expected cash inflows and outflows
in estimating transaction exposure.
It is exceedingly important to record the expected cash inflows and outflows for
specific time periods. This enables a firm to identify, measure, manage and monitor
its ongoing FX exposures over time. With this data a company may develop a view
of the extent of the risk associated with each exposure. The higher the probability
that the spot rate for a currency will change between the contract date and the
payment date, the greater the risk associated with any remaining exposure to it.
Chapter 18
1. It is argued that effective risk management is vital to the survival of an

organisation because:
A. most business organisations are exposed to a wide variety of

risks.
B. many business failures can be attributed to inadequate policies.

C. most organisations are exposed to interest rate risk.
D. all of the given choices are

correct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.1 Understand the nature and importance of risk and risk management, and explain the operational and financial
risk exposures that a business must manage.
2. Derivatives are the financial instruments that are:
A. financial assets, such as shares and bonds that derive their value from the
value of the company that issues them.
B. financial assets whose rates of return must be derived from

information published in financial pages.
C. financial assets that derive their value from underlying assets.

D. derived by investment banks, which then trade
them.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Risk management objectives and policies should be established by:
A. the chief executive

officer.
B. the chief financial

officer.
C. the board of
directors.
D. a company's shareholders.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. Derivative markets exist in order to:
A. allow for the direct cash sale of common shares.
B. allow for the direct cash sale of corporate

bonds.
C. reduce the risk of exposure to price fluctuations in cash markets.
D overcome some of the information problems involved in

. trades in over-the-counter markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. Risk exposures that may impact on the normal day-to-day running of a business are
called:
A. transactional.
B. operational.
C. financial.
D. functional.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Section: 18.1 Understanding risk

6. When an oil company suffers severe damage to one of its oil drilling platforms, this
is an example of:
A. technological
risk.
B. financial risk.
C. business
risk.
D. operational risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

7. Major financial risk exposures for corporations include:
A. a change in interest
rates.
B. foreign currency
appreciating.
C. company with insufficient funds to pay

wages.
D. all of the given

choices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

8. Which of the following businesses are most exposed to interest rate risk?
A. A company with a high equity to debt

ratio
B. A company with a large amount of floating rate

debt
C. An all-equity company
D An investment company with an investment portfolio that

. matches its investment horizon
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

9. Which of the following is NOT an example of financial risk exposure for a
company?
A. When interest rates increase and a larger proportion of mortgage

payments are in default for a bank
B. When a local currency decreases for an exporter
C When a company has taken out a short-term loan and floating

. interest rates increase
D. When interest rates increase for a highly geared company
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

10. The risk exposure when a corporation appears to have insufficient funds to meet
day-to-day commitments as they fall due is known as:
A. transaction
risk.
B. liquidity
risk.
C. interest rate
risk.
D. default
risk.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

11. For a company the process of risk management needs to:
A. cover financial and operational risks

only.
B. cover business and operational risks

only.
C. be a structured
process.
D. be flexible as the nature of risk is dynamic.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.2 Construct and analyse a structured risk management process that includes the identification, analysis and
assessment of risk exposures, the selection of risk management strategies and products and the establishment of control, monitoring,
Section: 18.2 The risk management process

12. One of the important first steps in a risk management strategy for a company is to:
A. establish related risk and product

controls.
B. analyse the impact of the risk exposure.
C. select appropriate risk management

strategies.
D. continually monitor the existing

strategies.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

13. The analysis that documents each risk exposure and then tries to measure what will
be the operational and financial effect should the risk event occur is called:
A. hedging
analysis.
B. cost-benefit
analysis.
C. business impact
analysis.
D. SMART
analysis.
Difficulty: Medium
Est time: <1 minute

14. According to the text there are three steps:
i. Assess the attitude of the organisation to each identified risk exposure
ii. Analyse the impact of the risk exposures
iii. Identify operational and financial risk exposures
Which is the correct order?
A. i, ii, iii
B. iii, ii, i
C. ii, i, iii
D. iii, i, ii
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

15. Which of the following statements is incorrect?
A. Part of a company's credit policy considers how much credit a customer

should be granted.
B. Cost-benefit analysis can be used to evaluate an investment of a back-

up computer centre or outsource the back-up to an outside centre
provider.
C After identification of all of its risk exposure an organisation must

. seek to remove all these risks.
D Procedural controls of a risk management strategy documents

. all the products that can be used by the organisation.
Difficulty: Medium
Est time: <1 minute

16. A futures contract is an agreement that specifies the delivery of a commodity or
financial security at a:
A. predetermined future date, with a price to be negotiated at the time of

delivery.
B. predetermined future date, with a currently agreed-on

price.
C. currently agreed-on price, with a delivery date to be negotiated

later.
D. predetermined future date, with a price and delivery to be

negotiated later.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.3 Examine the basic fundamentals of futures contracts.
Section: 18.3 Futures contracts

17. A standardised agreement traded on an organised exchange for delivery of a
specified security or commodity at a specified price on a predetermined date is
a/an:
A. hedging
contract.
B. futures contract.
C. option
contract.
D. swap
contract.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

18. In relation to futures markets, which of the following regarding initial margins is
false?
A. A futures trader is required to pay an initial margin to the

clearinghouse.
B. The initial margin will be higher for low market

volatility.
C If the futures contract price drops below the minimum percentage,

. the initial margin will have to be increased.
D In order to top up an insufficient initial margin a maintenance

. margin call will be made.
Difficulty: Easy
Est time: <1 minute

19. If a client investor is holding a large number of listed shares on the ASX, intends to
sell in three months' time and wishes to protect the value of the share portfolio,
they may:
A. buy a futures contract based on the S&P/ASX.
B. sell a futures contract based on the S&P/ASX.
C. write a put option based on the S&P/ASX.
D. buy a call option based on the S&P/ASX.
Difficulty: Medium
Est time: <1 minute
20. In Australia futures contracts are traded:
A. face-to-face by market
participants.
B. electronically by the ASX Trade
24.
C. over-the-counter by dealers.
D. over-the-counter by commodity and security

brokers.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. Which of the following statements relating to the use of futures contracts is
incorrect?
A. Futures contracts are derivative products that derive from a physical

market product.
B. The pricing of futures contracts is based on the price of the

underlying market product.
C Future physical market price changes are offset by a profit or loss

. in the futures market.
D Futures contracts are generally closed out by delivery of the
. physical market product.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. In the futures markets, if a futures contract is marked-to-market, this refers to the:
A. interaction of the demand and supply forces in the market to determine

the price of the options contract.
B. interaction of the demand and supply forces in the market to

determine the price of the futures contract.
C. settlement of gains and losses on futures contracts on a daily
basis.
D. settlement of gains and losses on forward contracts on a daily

basis.
Difficulty: Medium
Est time: <1 minute
23. In the futures markets, a maintenance margin call refers to:
A. funds paid to the clearing house by the brokers as insurance against

losses.
B. funds paid to the clearing house by each trader to cover losses.
C. realised profits paid by the clearing house to

traders.
D the difference between the futures contracts price and the
. underlying asset.
Difficulty: Medium
Est time: <1 minute
24. In the futures markets, when the initial margin of a futures account is topped up
daily to cover adverse futures price movements, this is called:
A. marked-to-market.
B. maintenance margin
call.
C. short
call.
D. closing-out.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
25. The market ASX Trade 24 trades in:
A. shares 24 hours.
B. shares and bonds 24 hours.
C. futures
contracts.
D. forward
contracts.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

26. In the futures markets, the funds that represent 2 to 10 per cent of the futures
contract that a client pays to the futures exchange clearing house are called:
A. maintenance
margin.
B. initial collateral.
C. margin
call.
D. initial
margin.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

27. A company, worried that the cost of funds might rise during the term of their short-
term borrowing, can hedge this rise by:
A. buying futures contracts on bank-accepted bills.
B. selling futures contracts on bank-accepted bills.
C. buying bank-accepted bills on the spot

market.
D. increasing the amount of money that has been borrowed.
Difficulty: Medium
Est time: <1 minute
28. In the futures markets, the price of a derivative contract for gold is based on:
A. prices of gold mining companies.

B. price of gold in the spot
markets.
C. price of gold in the forward

markets.
D. price of gold commodity indexes.
Difficulty: Medium
Est time: <1 minute
29. If a company intends to borrow in three months' time, it can lock in its borrowing
costs by:
A. buying futures contracts.
B. selling futures contracts.
C. going long on futures

contracts.
D. an arbitrage position on futures contracts.
Difficulty: Medium
Est time: <1 minute
30. A forward rate agreement (FRA) is an interest rate risk-management product,

generally provided by banks over the-counter. Which of the following statements
regarding forward rate agreements is correct?
A. FRAs are not standardised with regard to contract period and amount.
B. The centralised clearing house (CCH) holds the deposits and margin
calls.
C. As a bank is the counterparty to the FRA, there is no credit

risk.
D. All of the given
answers.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 18.4 Review the operation of forward exchange contracts and forward rate agreements.
Section: 18.4 Forward contracts
31. If an FRA dealer quotes ‘6Mv9M 7.25 to 20', this means that the dealer is prepared
to:
A. lend three-month money at 7.05% per

annum.
B. borrow three-month money at 7.05% per annum.
C. lend three-month money at 7.25% per

annum.
D. borrow three-month money at 7.25% per annum.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
32. The advantage of using a forward rate agreement FRA over a futures contract is:
A. FRAs are highly standardised.
B. FRAs have only an initial margin and no ongoing maintenance

margin.
C. the terms and conditions of a FRA can be

negotiated.
D. FRAs have standardised maturities.

Difficulty: Medium
Est time: <1 minute
33. When a company contacts a bank and asks for a 3-month forward rate and is
quoted by the bank's FX dealer AUD/USD0.9560-65 14.20, then the three month
forward rate is:
A. AUD/USD0.9536-
45
B. AUD/USD0.9540-
51
C. AUD/USD0.9574-
85
D. AUD/USD0.9580-
79
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
34. An option buyer:
A. has a greater insurance benefit than the purchaser of a futures

contract.
B. will generally incur a lower cost compared to a purchaser of a futures

contract.
C is purchasing a very risky instrument if they don't own the

. underlying asset as they are locked in to buying at expiration.
D. carries the risk of unfavourable price movements.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 18.5 Understand the nature and versatility of options contracts.
Section: 18.5 Option contracts

35. An option that gives the option buyer the right to buy the commodity or financial
instrument specified in the contact at the exercise price is called:
A. an American
option.
B. a European
option.
C. a call
option.
D. a put
option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

36. An option that gives the option buyer the right to sell the commodity or financial
instrument specified in the contact at the exercise price is called:
A. an American
option.
B. a European
option.
C. a call
option.
D. a put
option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

37. For a call option, the:
A. buyer is locked into receive the underlying asset at a specified time.
B. writer is committed to handing over the specified asset if the holder of

the call exercises the option.
C writer may choose whether or not to deliver the underlying asset

. at a specified time.
D buyer will choose to exercise the option only if the price of

. the underlying asset falls.
Difficulty: Medium
Est time: <1 minute
38. In a put option, the:
A. writer is locked into handing over the underlying asset at a specified

time.
B. buyer has the option to sell the specified asset at a specified
time.
C. buyer is locked into receiving the underlying asset at a specified

time.
D. seller must hand over the specified asset at a specified time.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
39. The holder of an American call option has the right to:
A. buy the underlying asset at the exercise price on or before the expiration
date.
B. buy the underlying asset only on the expiration

date.
C sell the underlying asset at the exercise price on or before the

. contract expiration date.
D. sell the underlying asset only at the expiration
date.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
40. The European call option gives the option buyer the right to exercise the option:
A. at any time up to the expiration date.
B. only on the expiration date.
C. if the price of the underlying asset falls below the exercise

price.
D. immediately after the payment of

dividends.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
41. In the option markets, the price specified in the contract at which the buyer of the
option can buy or sell the specified commodity or financial instrument is called the:
A. call
price.
B. exercise
price.
C. settlement price.
D. spot price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

42. For the writer of a put option, if the underlying share price:
A. moves above the strike price the potential profits are

unlimited.
B. drops below the strike price the potential profits are unlimited.
C. moves above the strike price, the potential profits are limited to
the premium.
D. moves above the strike price, the premium is reduced by the

difference.
Difficulty: Medium
Est time: <1 minute

43. In the derivative markets a swap is:
A. another name for a call

option.
B. another name for a put option.
C an agreement between two or more persons to exchange cash

. flows over some future period.
D. the name for the exchange of a futures contract for an option

contract.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 18.6 Consider the structure of an interest rate swap and a cross-currency swap.
Section: 18.6 Swap contracts

44. When two parties exchange the respective interest payments associated with
existing debt borrowed in the capital markets, this is called a/an:
A. interest exchange.
B. financial switch.
C. swap.
D. financial
transfer.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
45. An agreement between two parties to exchange a series of cash flows similar to
those resulting from an exchange of different types of bonds is called a/an:
A. credit
swap.
B. interest rate swap.
C. yield curve
swap.
D. notional
spread.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
46. The growth of the swaps market has been due to firms wanting to:
A. lower the cost of funds.
B. hedge interest rate

risk.
C. lock in profit
margins.
D. do all of the given
choices.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
47. The board of directors of a company is responsible for the implementation and
monitoring of risk management strategies.
FALSE
It is the chief executive officer of a company who is responsible for

implementation of adequate risk management procedures.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

48. For a corporation, external risk management strategies include leading and lagging
FX transactions.
FALSE
This is an internal strategy for a corporation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
49. A government introducing legislation requiring carbon-emitting companies to

lower their carbon emissions is an example of operational risk.
TRUE
Operational risks are those exposures that may impact on normal commercial
operations.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
50. A commercial bank has to consider in its risk management procedures not only
interest rate risk but also credit risk and liquidity risk.
TRUE
Interest rate risk can directly affect loan defaults for a bank and so lead to
consequential risks of credit risk and liquidity risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

51. An analysis of the costs associated with establishing and maintaining a particular
risk management strategy versus the risk management benefits to be obtained is
called a SMART analysis.
FALSE
When an analysis of the costs associated with establishing and maintaining a

particular risk management strategy versus the risk management benefits to be
obtained is done this analysis is called a cost-benefit analysis.
Difficulty: Easy
Est time: <1 minute
52. As risks for a company vary over time a flexible and robust risk management
strategy is essential for an organisation no matter how large or small.
TRUE
As well as having a structured risk management process a company must also have
an ongoing one.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
53. The prime function of a futures clearing house is to bring together the buyer and
seller in each futures contract.
FALSE
A clearing house records transactions and facilitates value settlement.
Difficulty: Medium
Est time: <1 minute

54. The maintenance margin call refers to the difference between the futures market
price and the futures contract.
FALSE
It refers to the requirement for additional funds to be added to the initial margin to
cover adverse futures contract price movements.
Difficulty: Medium
Est time: <1 minute
55. A FRA expressed as 3Mv5M means the settlement date is in three months and the
interest cover is for a five-month period.
FALSE
Rather it means the settlement date is in three months and the interest cover is for a
two-month period.
Difficulty: Medium
Est time: <1 minute
56. An American put option is worth more than a European put option as it can be
advantageous to exercise an American put option before expiry.
TRUE
Given the volatility of options a holder may find it is worth exercising before
maturity.
Chapter 19
1. Which of the following about futures contracts is incorrect?
A. Futures contracts are exchange-traded financial instruments.
B. The futures exchanges offer standardised futures

contracts.
C. The interest rate futures contracts, the FRA are traded on the
larger exchanges.
D The standard features of futures contracts include the
. underlying physical asset, the amount traded, how quoted and
how the contracts is settled.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 19.1 Consider the nature and purpose of derivative products and the use of a futures contract to hedge a specific
risk exposure.
2. Which of the following is a derivative product?
A. Commercial paper
B. Mortgag
e
C. Futures
D. Treasury
note
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
risk exposure.
3. In Australia the Sydney Futures Exchange (SFE) that is now merged with the ASX
introduced the 90-day bank-accepted bills futures contract in:
A. 1959.
B. 1969.
C. 1979.
D. 1989.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
risk exposure.
4. At the end of six months for a wheat farmer who sold previously a 6 month wheat
futures contract, he may:
A. deliver the wheat as per the contract and pay out the original agreed-upon
price.
B. can sell the wheat via the spot grain market and at the same time sell a
futures contract identical to the contract originally taken out.
C can sell the wheat via the spot grain market and at the same time
. buy a futures contract identical to the contract originally taken.
D will make a profit if the price of wheat has gone up on the day
. the farmer closes out his contract.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

risk exposure.
Section: 19.1 Hedging using futures contracts
5. Which of the following statements about futures contracts is correct?
A. Most futures contracts are held to

maturity.
B. Future contract holders will either buy or sell an opposite contract on

or before expiry date to close-out the contract.
C. The majority of commodity futures are held to

maturity.
D Financial futures contracts are delivered at maturity whereas

. all commodity futures are closed-out.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
risk exposure.

6. An orange grower who is concerned that the price of oranges will fall before
harvest and sale can:
A. buy an orange futures contract

today.
B. sell an orange futures contract

today.
C carry out in the futures market the opposite of what he plans to do

. in the physical market when his crop is ready for sale.
D. take a long position in orange

futures.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 19.2 Discuss the main features of a futures transaction, including orders and agreement to trade, calculations,
margin requirements, closing out a contract and contract delivery.
Section: 19.2 Main features of a futures transaction

7. At the present time:
A. open-outcry trading occurs for commodity futures contracts in

Australia.
B. the convention for quoting the prices of futures contracts varies

between exchanges around the world.
C. futures trading is permitted only for commodities.
D. futures trading is permitted only for financial

instruments.
Difficulty: Easy
Est time: <1 minute

8. Which of the following statements about futures is correct?
A. Most futures contracts result in

delivery.
B. Only a small percentage of financial futures contracts results in actual

delivery.
C. Only a quarter of financial futures contracts results in actual

delivery.
D. Financial futures contracts never result in actual

delivery.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

9. Which of the following statements is characteristic of futures trading on the
Australian Futures Exchange (ASX Trade 24)?
A. Pricing of bond contracts is on the basis of their yield to

maturity.
B. Transactions in the ‘trading pits' are conducted by ‘open

outcry'.
C The ASX Trade 24 clearing house enforces full payment of the

. initial contract amount.

correct.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

10. In the futures markets the buyer of a financial futures contract:
A. takes the long

position.
B. takes the short position.
C. has to record the contract with the clearing house.
D has the obligation to deliver the underlying financial asset at

. the specified future date.
Difficulty: Medium
Est time: <1 minute

11. In the futures markets, the buyer of a financial futures contract:
A. takes the short position.
B. has the obligation to deliver the underlying financial asset at the

specified future date.
C has the obligation to receive the underlying financial asset at the

. specified future date.
D. has to record the contract with the clearing house.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

12. In the futures markets, the seller of a futures contract:
A. takes the long

position.
B. has the obligation to deliver the underlying financial asset at the

specified future date.
C has the obligation to receive the underlying financial asset at the

D may, at their choosing, deliver or receive the underlying

. financial assets at the specified future date.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

13. In the futures markets, the seller of a futures contract:
A. takes the long

position.
B. takes the short position.
C has the obligation to receive the underlying financial assets at the

D. is expecting the price of the underlying asset to increase.
Difficulty: Easy
Est time: <1 minute

14. In the futures markets, the price of a futures contract is:
A. determined by market expectations of the spot price on the day of

delivery.
B. determined each day by the futures exchange.
C. specified in each futures

contract.
D determined by demand and supply between market

. participants in the futures market.
Difficulty: Medium
Est time: <1 minute

15. In futures markets, the terms of a futures contract, for instance the quality and
quantity of the commodity and the delivery date, are specified by the:
A. buyers.
B. buyers and sellers.
C. futures exchange.
D. brokers and
dealers.
Difficulty: Medium
Est time: <1 minute

16. Which of the following about futures orders is incorrect?
A. The order generally specifies whether it is a buy or sell

order.
B. The order specifies the type of contract and the delivery month.
C The orders are put into the trading system on the basis of size
. details any price restrictions.
D. The order specifies the time limit on the

order.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

17. Any Australian Treasury bond futures contract for a yield of 7.50 per cent per
annum is quoted on the futures exchange as:
A. 7.500
B. 92.50
C. 92.500
D. 107.50
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

18. Which of the following about Australian Treasury bond futures is NOT correct?
A. The Australian Treasury bond futures contract of 8 per cent is quoted as

92.0.
B. If a dealer buys a futures bond contract at 92.750 and sells at 93.500,

she makes a profit.
C If a dealer buys a futures contract at 7 per cent and sells at 8 per

. cent, he makes a profit.
D Futures are quoted as index of 100 minus the yield so that the
. dealer can buy high and sell low.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

19. If an investor buys a three-year Commonwealth Treasury bond futures contract at 7
per cent and on the delivery date the interest rate of Treasury bonds is lower than
they expected at 6 per cent, they will have:
A. gained money on their long position.
B. lost money on their long position.
C. lost money on their short position.
D. gained money on their short

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

20. If an investor buys a three-year Commonwealth Treasury bond futures contract at 6
per cent and on the delivery date the interest rate of Treasury bonds is lower than

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

21. If a bond investor sells a three-year Commonwealth Treasury bond futures contract
at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than

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

22. If a bond investor sells a three-year Commonwealth Treasury bond futures contract
at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than

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

23. A company has sold a three-year Commonwealth Treasury bond futures contract,
and now wishes to close out its open position on maturity date. Which of the
following statements relating to the closing out of a futures position is incorrect?
A. The company may enter into a ‘buy' contract of the same face value.
B. A new ‘buy' contract will have the identical delivery date as the
original ‘sell' contract.
C The company may choose to deliver the physical market Treasury

. bonds in settlement.
D The clearing house acts as counterparty to the contracts,

. through the process of novation.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

24. In the futures market, the instruction to a futures broker to buy or sell at the current
market price is a:
A. call
order.
B. limit
order.
C. market
order.
D. phone
order.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

25. In the futures market, an instruction to a futures broker to buy or sell up to a
specified price and within a specified time is a:
A. market
order.
B. margin
order.
C. limit
order.
D. liquid
order.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

26. An investor holds a long oil futures contract that expires in June. To close out her
position in oil futures before the delivery date, she must:
A. buy one June oil futures

contract.
B. buy two June oil futures

contracts.
C. sell one June oil futures contract.
D. sell one July oil futures contract.
Difficulty: Medium
Est time: <1 minute

27. Which of the following statements in relation to margins is correct?
A. An initial margin is held by the futures exchange.
B. The maintenance margin is the quantity of money you place with your
broker when you buy or sell a futures contract.
C The maintenance margin is the value of the margin account below

. which the holder receives a margin call.
D. All futures contracts have the same margin deposit.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

28. A futures exchange imposes an initial margin:
A. as the exchange needs to make a

profit.
B. as it gives the client trader more

leverage.
C to ensure brokers and traders are able to pay for any losses
. incurred over the life of the futures contract.
D. the exchange wants to ensure that futures contracts are

closed-out.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

29. As part of futures trading, exchanges have traders place an initial margin with its
clearing house because:
A. as the exchange has to cover its costs.
B. as it acts like a performance bond to support the value of the futures

contract.
C. the exchange wants to ensure that brokers make profits.
D. the exchange wants to ensure that futures contracts can be

closed-out.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

30. When Australian financial futures still in existence at trading close are settled with
the clearing house, final settlement in the form of standard delivery means:
A. the contract is settled in

cash.
B. the contract is settled by delivery of actual underlying financial asset.
C. the contract is closed out by delivery of the opposite

contract.
D the contract is settled by the sum of the initial margin and the
. variation margin.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

31. Which of the following relating to Commonwealth Treasury bond futures is
incorrect?
A. The three-year and 10-year Treasury bonds must be settled in

cash
B. They are quoted on the basis of their clean price
C. A 10-year Treasury bond futures contract's yield is quoted to

three decimal places
D. Currently the three- and 10-year bond futures are traded on

the SFE
Difficulty: Hard
Est time: <1 minute

32. On the ASX Trade 24, financial futures contracts are currently traded on all the
following securities, except:
A. bank bills.
B. Treasury
bonds.
C. corporate bonds.
D. interest rate
swaps.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.3 Review the types of futures contracts offered through a futures exchange.
Section: 19.3 Futures market instruments
33. The price of a short-term interest rate risk contract is generally derived from:
A. traded equity
prices.
B. the money market
instruments.
C. an underlying FX
contract.
D. commodities.
Difficulty: Medium
Est time: <1 minute
34. In futures markets investors who expect to purchase future bonds can reduce the
risk of price fluctuations by taking a/an:
A. arbitrage position on futures contracts.
B. long position on futures

contracts.
C. short position on futures contracts.

D. marked-to-market position on futures
contracts.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.4 Identify the participants in the futures market, including hedgers, speculators, traders and arbitrageurs, and
explain why they use futures contracts.
Section: 19.4 Futures market participants
35. In futures markets investors who expect to purchase future bonds may hedge
against the effects of falling interest rates by:
A. taking an arbitrage position on bond futures contracts.
B. buying bond futures contracts.
C. selling bond futures contracts.
D. buying and selling similar bond futures contracts.

Difficulty: Medium
Est time: <1 minute
36. An orange grower who wishes to protect his future orange crop from price
fluctuations can hedge by taking a/an:
A. arbitrage position on an orange futures contract.
B. long position on an orange futures contract.
C. short position on an orange futures

contract.
D. marked-to-market position on an orange futures contract.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
37. A wheat grower who wishes to protect his future wheat crop from price
fluctuations can:
A. take an arbitrage position on a wheat futures

contract.
B. buy a wheat futures

contract.
C. sell a wheat futures

contract.
D. take a marked-to-market position on a wheat futures

contract.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

38. A company who intends to borrow in 3 months can hedge and lock in the cost of
borrowing by:
A. buying an interest rate futures contract.
B. selling an interest rate futures contract.
C. selling a FRA.
D. buying an interest rate swap.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
39. A futures trader who has a _______ position in oil futures wants the price of oil to
_______ in the future.
A. short; double
B. short; fall
C. short; stay the same
D. short; rise
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
40. A futures trader who has a _______ position in oil futures wants the price of oil to
_______ in the future.
A. long;
increase
B. long;
fall
C. short; stay the same

D. short; rise
Difficulty: Medium
Est time: <1 minute
41. A steel manufacturing company that expects a future iron price rise can hedge and
take a/an:
A. arbitrage position on iron futures

contracts.
B. long position on iron futures contracts.
C. short position on iron futures contracts.

D. marked-to-market position on iron futures
contracts.
Difficulty: Medium
Est time: <1 minute
42. An Australian importer with FX payable in 3 months can hedge and lock in the
price of the required foreign currency by:
A. buying AUD
futures.
B. buying a currency
swap.
C. selling AUD
futures.
D. selling a currency swap.
Difficulty: Medium
Est time: <1 minute
43. An Australian exporter with FX receivable in 3 months can hedge and lock in the
price of the required foreign currency by:
A. buying AUD
futures.
B. buying a currency
swap.
C. selling AUD
futures.
D. selling a currency swap.
Difficulty: Medium
Est time: <1 minute
44. In the futures markets, hedgers are mainly interested in:
A. attempting to make a profit by betting on expected price changes.
B. reducing their exposure to risk of price

changes.
C. increasing market
liquidity.
D. reducing the spread between the bid and ask prices on
bonds.
Difficulty: Easy
Est time: <1 minute
45. In the futures markets speculators are mainly interested in:
A. attempting to make a profit by betting on expected price changes.
B. reducing their exposure to risk of price

changes.
liquidity.
bonds.
Difficulty: Easy
Est time: <1 minute
46. In the futures markets, arbitrageurs are mainly interested in:
A. reducing their exposure to risk of price

changes.
B. attempting to make a profit by taking advantage of price differentials

between different markets.
liquidity.
bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
47. In the futures markets, speculators take on extra risk in futures markets as a result
of the actions of:
A. day traders.
B. hedgers.
C. brokers.
D. traders.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
48. _______ try to make a profit by taking advantage of price differentials between the
futures markets or different markets.
A. Hedger
s
B. Arbitrageurs
C. Speculators
D. Trader
s
Difficulty: Easy
Est time: <1 minute
49. In the futures markets, price differences between the futures and the underlying
assets are reduced by the actions of:
A. speculators.
B. arbitrageurs
.
C. hedgers.
D. traders.
Difficulty: Medium
Est time: <1 minute

50. In the futures markets, profits from speculation primarily arise because of the:
A. spread between the bid and ask prices on bonds.
B. illiquidity of markets for derivative

securities.
C. high information costs in markets for derivative

instruments.
D difference in expectations among market participants about

. future prices of a commodity or financial asset.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

51. Which one of the following statements about speculators in futures markets is
correct?
A. Their main aim is to reduce their exposure to risk.
B. They make it difficult for hedgers to find someone to take the

opposite position.
C. They aid hedgers by adding to the liquidity in the markets.
D Once a trader is known as a speculator they are no longer

. allowed to participate in the markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

52. In the futures markets, speculators who strongly believe that interest rates will rise
are likely to:
A. buy futures contracts on Treasury

bonds.
B. sell futures contracts on Treasury

bonds.
C. buy Treasury bonds on the spot

market.
D. increase the amount of money that they currently lend.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

53. In the futures markets, speculators who strongly believe that prices of treasury
bonds will fall are likely to:
A. buy futures contracts on Treasury

bonds.
B. sell futures contracts on Treasury

bonds.
C. sell Treasury bonds on the spot

market.
D. decrease the amount of money that they currently

lend.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

54. In the futures markets, speculators who strongly believe that interest rates will fall
are likely to:
A. go long and buy futures contracts on Treasury

bonds.
B. go short and sell futures contracts on Treasury

bonds.
C. sell Treasury bonds on the spot

market.
D. decrease the amount of money that they currently

lend.
Difficulty: Medium
Est time: <1 minute

55. Buying a futures contract for one delivery date and selling an identical futures
contract with a different delivery date is called a:
A. margin position.
B. spread
position.
C. straddle.
D. speculative position.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

56. Buying a September bank bill futures contract and simultaneously selling a June
bank bill futures contract is a/an:
A. typical trading strategy for a

hedger.
B. typical trading strategy for an

arbitrageur.
C. example of a
spread.
D. example of a
straddle.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

57. Buying a September bank bill futures contract and simultaneously selling a June
Commonwealth Treasury bond futures contract is a/an:
A. typical trading strategy for a

hedger.
B. typical trading strategy for an

arbitrageur.
C. example of a
spread.
D. example of a
straddle.
Difficulty: Medium
Est time: <1 minute

58. A lender, worried that the value of their loan might fall during the term of the loan,
can hedge this fall by:
A. buying futures contracts on Treasury

bonds.
B. selling futures contracts on Treasury

bonds.
C. buying Treasury bonds on the spot

market.
D. increasing now the amount of money that has been

lent.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.5 Show how financial futures contracts may be used to hedge price risks, including a borrowing hedge, an
investment hedge, an FX hedge and a share portfolio hedge.
Section: 19.5 Hedging: risk management using futures

59. An Australian bank must pay US$10 million in 90 days. It wishes to hedge the risk
in the futures market. To do so, the bank should:
A. buy AUD 10 million in US dollar

futures.
B. sell AUD 10 million in US dollar futures, with three-month

maturity.
C. buy USD 10 million in US dollar futures.
D. sell USD 10 million in US dollar

futures.
Difficulty: Medium
Est time: <1 minute

60. A company has identified an exposure to movements in interest rates on its existing
debt facilities. The company is considering selling futures contracts to manage that
risk and is unsure which of the following contracts may NOT be used for managing
A. 90-day bank-accepted bills contract
B. S&P/ASX 200
Index
C. Three-year Commonwealth Treasury bond

contract
D. Option on a 90-day bank-accepted bill futures contract
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

61. Calculate the market value of a bank bill futures contract with a face value of $1
000 000, a reported price of $93.75 and 90 days to maturity.
A. $866 468.84
B. $983 628.65
C. $984 822.93
D. $998 461.28
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

62. Calculate how much a futures trader who enters into a 90-day bank bill futures
contract on 20 September with a reported price of $93.25 will need to pay on
settlement date (30 September), if the face value of the underlying bill is $1 000
000.
A. $857 310.63
B. $983 628.65
C. $984 822.93
D. $998 338.38
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

63. A company has an existing $900 000 promissory note facility, which it will roll
over in 90 days. It is concerned that interest rates will rise before the roll-over date
and enters into a 90-day bank-accepted bill futures contract at 92.50. Three months
later, the company closes out its futures position at 91.75. Using the following data,
calculate the profit or loss position of the futures transactions. (Disregard margin
calls and transaction costs.)
A. $1 601.58 profit
B. $1 601.58 loss
C. $1 779.54 profit
D. $1 779.54 loss
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

64. A funds manager manages a diversified Australian share portfolio, but is concerned
that stock prices in the market will fall over the next three months. The manager
decides to hedge the risk by selling 100 S&P/ASX All Ordinaries Share Price
Index futures contracts at 23.55. Three months later, when the manager closes out
the position, the contract is trading at 24.10. Calculate the profit or loss position of
the futures transactions.
A. $5500 loss
B. $24 100 profit
C. $137 500 loss
D. $550 000 profit
Difficulty: Hard
Est time: <1 minute

65. Basis risk refers to the risk:
A. associated with anticipated price movements in the cash market.
B. associated with unanticipated price movements on the underlying

asset.
C. of default on the futures

contract.
D from a change in the spread between the price on the

. commodity or financial security in the physical market and
the price of the related futures contract.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

66. One of the problems of hedging with a futures contract compared with a forward
contract is:
A. basis risk.
B. default
risk.
C. settlement risk.
D. interest rate
risk.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 19.6 Identify risks associated with using a futures contract hedging strategy, including standard contract size,
margin payments, basis risk and cross-commodity hedging.
Section: 19.6 Risks in using futures contracts for hedging

67. A company is considering using futures contracts to hedge an identified interest
rate exposure on its debt facilities. However, it is concerned about the impact of
basis risk. Which of the following statements regarding basis risk is incorrect?
A. Basis is the difference between price in the physical market and the price
of the relevant futures market contract.
B. The existence of basis risk removes the opportunity for a perfect

borrowing hedge.
C Initial basis will be evident while the market is of the view that
. physical market prices will remain stable.
D Final basis will exist where a futures contract is used to hedge

. a risk associated with a different physical market product.
Difficulty: Hard
Est time: <1 minute

68. Which of the following best describes the risks associated with futures contracts?
A. The possibility of making an unexpected profit on a futures

contract
B. The probability of making a loss, or a fall in the value of a futures

contract
C The variability of changing prices and costs associated with

. buying and selling futures contracts
D The possibility of loss associated with the default by the

. holder of the opposite position in the contract
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

69. Which of the following about hedging is incorrect?
A. With the Australian future market an investor will have to use a 90-day
bank-accepted-bill to hedge commercial paper.
B. In the Australian futures market a borrower will have to use 3-year

Treasury bond futures to hedge a loan facility with a term to maturity
of 3 to 5 years.
C A borrower will have to use a 10-year Treasury bond future to

. hedge an issue of long-term debentures.
D When prices of 3-year Treasury bond futures varies over time

. with the prices of long-term debentures this is called spread-
commodity hedging.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

70. In using futures contracts for hedging which of the following is an important
consideration?
A. The standard contract

size
B. The margin
payment
C. The basis risk
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

71. In comparing forwards and futures, futures are typically:
A. riskier than
forwards.
B. more liquid than forwards.
C. traded on an organised
exchange.
D. all of the given

choices.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 19.7 Describe, illustrate and calculate the use of a forward rate agreement (FRA) for hedging interest rate risk.
Section: 19.7 Forward rate agreements

72. Futures contracts _______ traded on a formal, organised exchange, and forward
contracts _______ traded on a formal, organised exchange.
A. are; are
also
B. are not; are
C. are; are not
D. are; may be
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
73. The terms of futures contracts _______ standardised and the terms of forward
contracts _______ standardised.
A. are; are
also
B. are not; are
C. are; are not
D. are; may be
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
74. Which of the following statements is a key difference between forwards and
futures?
A. Futures contracts are more expensive than forward

contracts.
B. Forward contracts are offered only for foreign

currencies.
C. Futures contracts are always

delivered.
D. Forward contracts are not generally marked-to-market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
75. A key characteristic of forward contracts that recommends their use over futures
contracts is:
A. forwards are not traded on exchanges and marked-to-

market.
B. forward contracts allow flexibility with respect to contract period.
C forwards are not standardised instruments with regard to the

. amount of each contract.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
76. The over-the-counter derivative product used to manage interest rate risk is a/an:
A. futures contract.
B. forward rate
agreement.
C. yield rate agreement.
D. duration agreement.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

77. If a FRA covers six-month interest rates but will begin its cover in three months it
will be written:
A. 6Mv9M
.
B. 3Mv9M
.
C. 3Mv6M
.
D. 6Mv3M
.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

78. If a borrower has entered into a FRA and its interest cover is specified as 3Mv9M,
this means:
A. nine-month interest rates beginning in three months.
B. six-month interest rates beginning in three-

months.
C. nine-month interest rates beginning in six

months.
D. six-month interest rates beginning in six

months.
Difficulty: Medium
Est time: <1 minute

79. A key characteristic of futures contracts that recommends their use over forwards
contracts is:
A. futures are traded on exchanges and marked-to-

market.
B. futures contracts allow flexibility in delivery dates.
C. futures are traded in liquid markets and allow netting of

positions.
Difficulty: Medium
Est time: <1 minute
80. For hedging interest rates the advantages of a FRA are:
A. it is not standardised like a futures

contract.
B. it does not have associated margin
payments.
C. it is flexible with regard to contract period and amount.
D. all of the given

choices.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
81. A company will need to ‘roll over' its existing $500 000 funding arrangement in
two months' time for a further 90 days. It is concerned that interest rates in the
short-term debt market may rise in the mean time, and decides to manage the risk
exposure by entering into a forward rate agreement with its bank. The bank quotes
a price (2Mv5M) of 9.45 to 30. In two months' time the reference rate (BBSW) is
10.20% per annum. Calculate the settlement amount.
A. $881.43
B. $1058.10
C. $1423.80
D. $3750.00
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
82. A company has entered into a forward rate agreement with a corporate borrower.
The following terms and conditions apply to the contract:
Notional principal: $350 000
Contract rate: 12.65% per annum
Reference rate: 13.10% per annum
FRA period: 180 days
Who will be responsible for payment of the settlement amount?

A. The company
B. Neither party—no settlement amount is

payable
C. The bank
D. The clearing house
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
83. A futures contract can be defined as a contract which provides something to be

bought or sold at a future date at a price decided upon at the expiry of the contract.
FALSE
A futures contract involves something to be bought or sold at a future date at a

price decided today.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Easy
Est time: <1 minute
risk exposure.
84. A bond trader who buys a Treasury bond futures contract at a yield of 6.25% per
annum and then sells it at 5.5% per annum makes a profit on the contract.
TRUE
Using the quoting convention, the contract price is 93.750 and it is sold at 94.50.
Difficulty: Medium
Est time: <1 minute

85. The process of marking to market is when the clearing house demands funds from
every futures trader that incurs a loss.
FALSE
Both sets of traders are involved: those who earn a profit have funds returned and
funds are demanded from those who incur a loss.
Difficulty: Medium
Est time: <1 minute
86. If you buy a bank-accepted futures contract and on delivery date the interest rate on
bank-accepted bills is lower than you expected you will have gained money on
your long position.
FALSE
You would have lost money on your long position.

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
87. If a futures contract holder fails to meet a margin call, the futures exchange
clearing house will routinely close out the open position.
TRUE
Funds held in the margin account will be used to offset any futures contract loss.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

88. If someone enters into a futures contract with the intention of taking delivery of a
commodity or financial instrument specified in the futures contract for a price that
was determined before delivery, they are likely to be a hedger.
TRUE
Hedgers use the futures markets to try to manage risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
89. In the futures markets a speculator who believes strongly that interest rates will fall
in the near future would be likely to buy futures contracts on Treasury bonds.
FALSE
A speculator should sell futures contracts on Treasury bonds, i.e. a short contract.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
90. When a lender uses a 10-year Treasury bond futures contract to hedge an issue of
an unsecured note, this type of hedging is called intersection-commodity hedging.
FALSE
It is known as cross-commodity hedging.
Difficulty: Easy
Est time: <1 minute

91. Basis risk refers to the risk associated with unanticipated price movements.
FALSE
It is the risk arising from a change in the spread between the rate on the hedged
instrument and the rate on the instrument actually traded.
Difficulty: Easy
Est time: <1 minute
92. Large companies often prefer futures to FRAs because they are generally easy to
close out compared with a forward contract.
TRUE
There is no formal market in FRAs comparable with the futures market.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

93. Comment briefly on the history of futures contracts.
Futures contracts in some form have existed for hundreds of years. In Japan, for
hundreds of years there have been examples of rice futures contracts that set a price
for risk on the contract date but fix the delivery of the rice at some specified future
date. In the US the Chicago Board of Trade (CBOT) established an organised
market in futures contracts on grains and later expanded to offering contracts on
many agricultural, mineral and timber contracts. In 1975 the CBOT introduced the
first financial futures contract on interest rates.
risk exposure.
94. Initial margin and marking to market are important risk procedures in futures
markets. Discuss their role.
Given price in futures contracts over their lifetime generally shows high volatility,
futures exchanges have evolved the risk management procedures of having market
participants put up an initial margin or deposit and follow the procedure of marking
to market. As the price of futures contracts varies on a daily basis a customer may
receive a margin call to deposit more funds in their margin account if the value of
their contract has moved in an unfavourable direction. Likewise, their account may
increase in credit if the value has moved in a favourable direction.
95. List the range of futures contracts currently offered by ASX Trade 24 and briefly
discuss their role.
Short-term interest rate contracts offered on the ASX Trade 24 are 30-day inter-
bank cash rate and 90-day bank-accepted bills and longer term contracts are three-
year Treasury bonds and 10-year Treasury bonds, together with three-year interest
rate swap and 10-year interest rate swap. Equity-linked contracts are S&P/ASX 50
Index, S&P/ASX 200 Index, S&P/200-A-REIT and selected individual publicly
listed company shares.
Bloom's: Knowledge
96. Explain simply what is meant by hedging and how the basic rule is implemented.
Hedging is a process whereby a risk manager attempts to manage a risk exposure,

such as potential changes in the value of financial or physical assets. In the case of
hedging with futures contracts, a hedger can use a futures contract to create a
situation in which any change in the physical market price of a commodity or
financial instrument can be offset by a profit or loss derived from a corresponding
change in the value of a futures contract risk management strategy.
Bloom's: Synthesis

97. Discuss in relation to the Australian 10-year Treasury bond contract how it may be
used to hedge a longer term interest rate exposure.
If two companies have different and opposite risk exposures and wish to hedge
their position, one company will want to buy one 10-year Treasury bond futures
contract and the other company will want to sell one 10-year Treasury bond futures
contract. Each company will place an order with a futures broker to buy/sell an
Australian 10-year Treasury bond contract on the SFE that uses the ASX integrated
electronic trading and settlement systems. The system automatically matches the
corresponding buy and sell orders in a time and price matching process.
Chapter 20
1. An options contract:
(p.
Question 1
An options
contract:)
A. is another name for a forward

contract.
B. gives the right to buy or sell an underlying asset at a predetermined

price by a specified time.
C. may be written for debt securities but not

equities.
D. may be written for equities but not debt

securities.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 20.1 Understand the structure and operation of option contracts, and describe the types and component parts of
option contracts available in the global markets.
Section: 20.1 The nature of options
2. In the option markets, the option that gives the buyer the right to buy the
specified commodity or financial instrument is a/an:
(p.
Question 2
In the
option
markets,
the option
that ...)
A. call option.
B. put
option.
C. American option.
D. Asian
option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. In the options market the option that gives the buyer the right to sell the specified
commodity or financial instrument is:
(p.
Question 3
In the
options
market the
option that
gives ...)
A. call option.
B. put
option.
C. American option.
D. Asian
option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

4. In the options market, the right to buy an underlying asset lies with:
(p.
Question 4
In the
options
market, the
right to buy
an ...) A. call buyers.
B. put
buyers.
C. European put
buyers.
D. writers of an option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

5. In the options markets for a call option, the:
(p.
Question 5
In the
options
markets for
a call
option, ...) A. buyer is committed to receive the underlying asset at a specified time.
B. seller is committed to handing over the specified asset at a specified

time.
C seller may choose whether or not to deliver the underlying asset

D buyer will choose to exercise the option only if the price of

. the underlying asset falls.
Difficulty: Medium
Est time: <1 minute

6. In the options markets, for a call option, the:
(p.
Question 6
In the
options
markets,
for a call
option, ...) A. buyer is committed to receive the underlying asset at a specified time.
B. seller is committed to deliver the specified asset at a specified time.
C seller may choose whether or not to deliver the underlying asset

D buyer will choose to exercise the option if the price of the

. underlying asset has fallen below the exercise price.
Difficulty: Medium
Est time: <1 minute
7. In the options markets for a put option, the:
(p.
Question 7
In the
options
markets for
a put
option, ...) A. seller is committed to receiving the underlying asset at a specified time.
B. buyer is committed to handing over the specified asset at a
specified time.
C. buyer is committed to receiving the underlying asset at a

specified time.
D seller is committed to handing over the specified asset at a

. specified time.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
8. In a put option, the:
(p.
Question 8
In a put
option,
the:)
A. seller may choose whether to receive the underlying asset at a specified

time.
B. buyer will exercise the option if the price of the underlying asset has
fallen below the exercise price.
C. buyer is committed to receiving the underlying asset at a

specified time.
D seller is committed to handing over the specified asset at a
. specified time.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
9. In options markets an American call option lets the buyer:
(p.
Question 9
In options
markets an
American
call option
...) A. buy the underlying asset at the exercise price on or before the expiration
date.
B. buy the underlying asset at the exercise price only on the expiration
date.
C sell the underlying asset at the exercise price on or before the

. contract expiration date.
D. sell the underlying asset only at the expiration
date.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
10. In options markets, an American put option lets the buyer:
(p.
Question
10 In
options
markets, an
American
put option A. buy the underlying asset at the exercise price on or before the expiration
...)
date.
B. sell the underlying asset at the exercise price on or before the

expiration date.
C potentially benefit from a share decrease with less risk than

. selling the share short.
D. sell the underlying asset only at the contract expiration
date.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
11. In the options markets, an American call option should have a higher premium
than the comparable European call option because:
(p.
Question
11 In the
options
markets, an
American
call ...)
A. it is more volatile in price.
B. it is less volatile in price.
C. it gives more flexibility to the

holder.
D a call would not be exercised unless the exercise price
. exceeded the share price.
Difficulty: Medium
Est time: <1 minute
12. For the buyer of an option, the premium paid for the contract represents the:
(p.
Question
12 For the
buyer of an
option, the
premium
...) A. transaction cost.
B. maximum
return.
C. largest potential
loss.
D. yield.
Difficulty: Medium
Est time: <1 minute
13. In the options markets, an American put option can be exercised:
(p.
Question
13 In the
options
markets, an
American
put ...) A. only on the expiration date.
B. at any time up to the expiration date.
C. any time in the indefinite

future.
D. only after the payment of dividends.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. A European call option can be exercised:
(p.
Question
14 A
European
call option
can be
exercised:) A. only on the expiration date.
B. at any time up to the expiration date.
C. if the price of the underlying asset falls below the exercise

price.
D. immediately after the payment of

dividends.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

15. In options markets, options that give the option buyer the right to exercise the
option only on the maturity date are:
(p.
Question
15 In
options
markets,
options that
give the ...)
A. call
options.
B. put options.
C. European-type
options.
D. American-type
options.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

16. In options markets, options that give the option buyer the right to exercise the
option at any time up to the maturity date are:
(p.
Question
16 In
options
markets,
options that
give the ...)
A. call
options.
B. put options.
C. European-type
options.
D. American-type
options.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

17. If an option buyer wanted to decide only at the expiration date whether or not to
exercise the option then and the price locked into that date, they would buy:
(p.
Question
17 If an
option
buyer
wanted to
decide only
at ...)
A. An Asian
option.
B. a LEPO option.
C. a European-type
option.
D. an American-type
option.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

18. The advantages of using an American type option compared to a European type
option:
(p.
Question
18 The
advantages
of using an
American
type ...)
A. is American options are

cheaper.
B. have a longer maturity

date.
C. have lower
volatility.
D. can be exercised at any time up to

maturity.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

19. In option markets the price specified in the option contracts for calls and puts is
called the:
(p.
Question
19 In
option
markets the
price
specified in
the...)
A. market
price.
B. option price.
C. strike price.
D. expected value.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

20. In options markets the strike price is the price:
(p.
Question
20 In
options
markets the
strike price
is the ...) A. an option buyer pays for
it.
B. an option writer receives.
C specified in an options contract at which the buyer can buy or

. sell the underlying asset.
D. at which a buyer can buy or sell the option in the market.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
21. In an options contract, the strike price is also known as the:
(p.
Question
21 In an
options
contract,
the strike
price is ...) A. fixed price.
B. equilibrium price.
C. exercise
price.
D. market
price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
22. In options markets, the price paid by an option buyer to the writer of the option is
the:
(p.
Question
22 In
options
markets,
the price
paid by an
...)
A. call
price.
B. premium.
C. put
price.
D. strike price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
23. A ________ option is an option to purchase a specified number of shares on or

before some future date at a specified price, whereas a _______ option is an
(p.
Question option to sell a specified number of shares on or before some future date at a
23 A specified price. ______ are bought if the share is expected to rise.
________
option is an
option to
purchase
...)
A. put; call; Puts
B. call; put; Puts
C. call; put;
Calls
D. put; call;
Calls
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
24. Which of the following statements about calls and puts is incorrect?
(p.
Question
24 Which
of the
following
statements
about ...) A. Options do not provide any funding to the
company.
B. Exchange-traded options are highly standardised.
C. Options are generally issued by

companies.
D. Options are generally traded on an organised
exchange.
Difficulty: Easy
Est time: <1 minute
25. Which of the following is NOT true of calls and puts?
(p.
Question
25 Which
of the
following is
NOT true
of calls ...) A. They are generally traded on organised
exchanges.
B. They can be used to hedge a gain or prevent a loss on a stock

holding.
C They provide the buyer with an opportunity of greater profits

. than simply from buying and selling the underlying shares.
D. They both result in new equity capital for the
company.
Difficulty: Medium
Est time: <1 minute
26. In options markets the fee charged by a seller of an option is called the:
(p.
Question
26 In
options
markets the
fee charged
by a ...) A. call
price.
B. futures fee.
C. market
price.
D. option premium.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
27. The decision between selecting a future or an option:
(p.
Question
27 The
decision
between
selecting a
future or A. reflects a trade-off between the higher cost of using options and the
...)
extra insurance benefits that options provide.
B. reflects the greater risk of using options and the extra insurance
benefits that options provide.
C reflects a trade-off between the higher cost of using futures and

. the extra insurance benefits that futures provide.
D depends on whether the underlying instrument is an equity
. or debt instrument.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
28. In options markets, the maximum loss a buyer of a share call option can undergo
is equal to the:
(p.
Question
28 In
options
markets,
the
maximum
loss a ...)
A. share price minus the value of the
call.
B. strike price minus the share price.
C. call premium.
D. share price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 20.2 Explain the profit and loss payoff profiles of call option and put option contracts, and consider the
requirements of covered option contracts.
Section: 20.2 Option profit and loss payoff profiles
29. In options markets, the maximum loss a buyer of a share put option can undergo
is equal to the:
(p.
Question
29 In
options
markets,
the
maximum
loss a ...)
A. share price minus the value of the
put.
B. strike price minus the share price.
C. put
premium.
D. share price.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. What type of option will an option buyer purchase if they believe a share price
will rise?
(p.
Question
30 What
type of
option will
an option
buyer ...)
A. Call
B. Pu
t
C. Warran
t
D. Swaptio
n
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
31. What type of option will an option buyer buy if they believe a share price will
fall?
(p.
Question
31 What
type of
option will
an option
buyer ...)
A. Call
B. Pu
t
C. Warran
t
D. Swaptio
n
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
32. On the expiration date for a call option with strike price of $10.00, premium
$1.50 and the current spot price of $9.00, the holder will:
(p.
Question
32 On the
expiration
date for a
call option
...)
A. have a total loss of $2.50
B. let the option contract lapse.
C. sell the shares at

$9.00
D. close it out by buying a put
option.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
33. On the expiration date for a call option with strike price of $10.00, premium
(p.
Question
33 On the
expiration
date for a
call option
...)
A. buy the shares in the market place.
C. exercise the option.
D. make a profit of $1.50

AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
34. On the expiration date for a put option with strike price of $10.00, premium
(p.
Question
34 On the
expiration
date for a
put option
...)
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

35. On the expiration date for a put option with strike price of $10.00, premium
(p.
Question
35 On the
expiration
date for a
put option
...)
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

36. Which of the following statements about option contracts is incorrect?
(p.
Question
36 Which
of the
following
statements
about ...) A. The seller of a put option loses if the spot price, plus the premium, is
below the exercise price when the option is exercised.
B. The buyer of a call option benefits if the price of the spot is above
the exercise price when the option is exercised.
C The buyer of a put option gains if the price of the spot is below
. the exercise price when the option is exercised.
D The seller of a call option loses if the spot price, plus the
. premium, is below the exercise price when the option is
exercised.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

37. An investor purchases a call option at a premium of $1.25, with an exercise price
of $7.50 within three months. The holder of the option will:
(p.
Question
37 An
investor
purchases
a call
option at a
...)
A. be in-the-money if the market price of the shares reaches $6.25
B. only exercise the option if the current market price reaches or

exceeds $8.75
C. exercise the option at any price above $7.50, if

necessary.
D. break even at a market price of $7.50, and will exercise the

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

38. Which of the following statements best reflects the following profit profile of an
option contract?
(p.
Question
38 Which
of the
following
statements
best ...)
A. The profile depicts the short call position of the option

seller.
B. The profile depicts the long call position of the buyer of the option.
C. The profile depicts the short put position of the option

seller.
D. The profile depicts the long put position of the buyer of the
option.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

option contract?
(p.
Question
39 Which
of the
following
statements
best ...)

seller.

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

option contract?
(p.
Question
40 Which
of the
following
statements
best ...)

seller.

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

option contract?
(p.
Question
41 Which
of the
following
statements
best ...)

seller.

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

42. Buyers of put options expect the value of the underlying asset to _______, and
the sellers of call options expect the value of the underlying asset to ________.
(p.
Question
42 Buyers
of put
options
expect the
value of ...)
A. increase;
increase
B. decrease; increase
C. increase; decrease
D. decrease; decrease
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

43. An investor holds long call options that may be exercised at any time over the
next month. The spot price of the underlying asset is $12.75; the strike price of
(p.
Question the option is $15.10; and the premium paid was $2.35. What is the value of the
43 An option to the holder?
investor
holds long
call options
that ...)
A. -
$2.35
B. zero
C. $10.40
D. $15.10
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

44. Calculate the value of a long call if the exercise price is $10.00, the premium is
$1.50 and the spot price is $8.00, given V = max(S-X, 0) – P.
(p.
Question
44
Calculate
the value of
a long call
if the ...)
A. -
$3.00
B. -
$1.50
C. $0.00
D. $0.50
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

45. Calculate the value of a short call if the strike price is $10.00, the premium is
$1.50 and the spot price is $8.00, given V = P - max(S-X, 0).
(p.
Question
45
Calculate
the value of
a short call
if the ...)
A. -
$1.50
B. -
$0.50
C. $0.50
D. $1.50
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

46. Calculate the value of a long put if the exercise price is $10.00, the premium is
$1.50 and the spot price is $8.00, given V=max(X-S, 0) – P.
(p.
Question
46
Calculate
the value of
a long put
if the ...)
A. -
$3.00
B. -
$1.50
C. $0.00
D. $0.50
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

47. Calculate the value of a short put if the exercise price is $10.00, the premium is
$1.50 and the spot price is $8.00, given V = P - max(X-S, 0).
(p.
Question
47
Calculate
the value of
a short put
if the ...)
A. -
$1.50
B. -
$0.50
C. $0.00
D. $0.50
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

48. The main feature of the potential profit and loss profile for a long put party may
be best described as:
(p.
Question
48 The
main
feature of
the
potential
profit ...)
A. the further the spot price is above the exercise price, the greater the
profit.
B. profits are made from exercising an option when the spot price falls
below the exercise price adjusted for the premium.
C. a loss is sustained if the spot price is less than the exercise

price.
Difficulty: Medium
Est time: <1 minute

49. The most important benefit of an options contract strategy for a hedger is:
(p.
Question
49 The
most
important
benefit of
an options A. the income paid to the writer of the
...)
option.
B. risk of loss from unfavourable price movements is

limited.
C. the premium is kept by the seller of the option.
D. the option can be exercised at any

time.
Difficulty: Medium
Est time: <1 minute

50. Which of the following best reflects the exposure position of a writer of a put
option?
(p.
Question
50 Which
of the
following
best
reflects the
...)
A. A loss is made when the spot price is below the exercise price adjusted
by the premium.
B. The extent of the loss potential is limited to a zero spot price less the
premium paid.
C. The maximum profit to the writer is limited to the extent of the

premium paid.
D. All of the given

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

51. A covered call position is:
(p.
Question
51 A
covered
call
position
is:) A. the purchase of a share at the same time as selling a put on that
share.
B. the simultaneous purchase of a call and the underlying

asset.
C. selling a share short at the same time as selling a call on that

share.
D. the purchase of a share at the same time as selling a call on

that share.
Difficulty: Medium
Est time: <1 minute

52. A hedge fund has written a call option on shares of a company with an exercise
price of $17.45, and simultaneously also buys a call option on the same share
(p.
Question with an exercise price of $16.95. The hedge fund is considered to have written
52 A hedge a/an:
fund has
written a
call option
on ...)
A. arbitrage option.
B. naked call/put contract.
C. covered call option.
D. margin call
option.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

53. In options markets, where a call writer holds the underlying assets, this is called
a:
(p.
Question
53 In
options
markets,
where a
call writer
...)
A. long put.
B. short
put.
C. covered call.
D. covered
spread.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

54. The loss for a writer of a naked call option on a share is potentially _____ and so
currently short-selling is banned in Australia.
(p.
Question
54 The loss
for a writer
of a naked
call ...)
A. limite
d
B. unlimite
d
C. larger the more the share price

falls
D. equal to the call premium
Difficulty: Medium
Est time: <1 minute

55. When we contrast futures with options contracts, we can say that:
(p.
Question
55 When
we contrast
futures with
options ...)
A. in a futures contract, the buyer and seller have asymmetric rights,
whereas in an options contract the buyer and writer have symmetric
rights.
B. in a futures contract the buyer and seller have symmetric rights,

whereas in an options contract the buyer and writer have
asymmetric rights.
C for both futures contracts and options contracts the buyer and
. writer have symmetric rights.
D for both futures contracts and options contracts the buyer

. and writer have asymmetric rights.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

56. Which of the following is NOT a condition applied to call options listed on the
Australian Securities Exchange (ASX Trade) on leading ordinary shares?
(p.
Question
56 Which
of the
following is
NOT a
condition
...)
A. Typically, there are numerous option contracts offered on a particular
share over a range of expiration dates.
B. A long call option buyer must meet the deposit and margin calls of
the clearing house whereas the writer does not have to.
C Typically, three or more options are traded with the same

. expiration date, but with different strike prices.
D The Options Clearing House handles the assignment of

. option contract exercise notices submitted by buyers.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 20.3 Describe the structure and organisation of the international and Australian options markets, including
examples of the types of option contracts available.
Section: 20.3 The organisation of the market

57. The highly geared option contract on individual stocks on the ASX with an
exercise price of between one and ten cents is a/an:
(p.
Question
57 The
highly
geared
option
contract on
...)
A. capped
warrant.
B. LEPO.
C. instalment warrant.
D. endowment warrant.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
58. In the Australian options markets a LEPO is:
(p.
Question
58 In the
Australian
options
markets a
LEPO is ...) A. low-expiration price
option.
B. low-exercise price option.
C. large exercise price

option.
D. long-exercise price
option.
Difficulty: Medium
59. In the Australian options markets the warrant that has an upper limit applied to
the upside profit available for the holder is a/an:
(p.
Question
59 In the
Australian
options
markets the
...)
A. capped
warrant.
B. LEPO.
C. instalment warrant.
D. endowment warrant.
Difficulty: Hard
Est time: <1 minute
60. The option that is a highly leveraged option on individual stocks, with an
exercise price of between one and ten cents, traded on the ASX Trade, with a
(p.
Question European-type expiry, is a:
60 The
option that
is a highly
leveraged
...)
A. strip
.
B. warrant.
C. barrier option.
D. LEPO.
Difficulty: Medium
Est time: <1 minute
61. In the Australian options markets, a warrant that is made up of a selection of

shares from the mining industry is an example of a/an:
(p.
Question
61 In the
Australian
options
markets, a
...)
A. basket warrant.
B. index
warrant.
C. capped
warrant.
D. instalment warrant.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

62. What security gives the holder an option to purchase a specified number of shares
at a predetermined price within a certain period of time?
(p.
Question
62 What
security
gives the
holder an
option to
...)
A. A convertible
bond
B. A put
option
C. An equity
warrant
D. A repurchase
agreement
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

63. A lender, concerned that its cost of funds might rise during the term of a loan it
has made, can hedge this rise without forgoing the chance to profit by a decline
(p.
Question in the cost of funds. This is done by:
63 A
lender,
concerned
that its cost
of funds ...)
A. selling futures contracts on Treasury

bills.
B. buying futures contracts on Treasury

bills.
C. buying call options on Treasury

bills.
D. buying put options on Treasury

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

64. When interest rates are forecasted to rise, a company approaches its bank before
the next roll-over date of its current debt facilities, and buys an interest rate cap
(p.
Question option. However, the company is concerned at the cost of the cap premium and
64 When decides to simultaneously sell an interest rate floor option of the same maturity.
interest
rates are Which of the following statements is correct?
forecasted
to ...)
A. The transactions may be described as an exchange traded options

contract.
B. The company has obtained cover with a collar option

strategy.
C. This option strategy will achieve a zero cost outcome for the
company.

correct.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 20.4 Identify and explain important factors that affect the price of an option contract, including intrinsic value, time
value, price volatility and interest rates.
Section: 20.4 Factors affecting an option contract premium

65. Suppose that Maxima shares are selling for $10 per share and you own a call
option to buy Maxima shares at $7.50. The intrinsic value of your option is:
(p.
Question
65 Suppose
that
Maxima
shares are
selling for
...)
A. $10.00
B. $7.50
C. $2.50
D. not determinable without further information.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
66. The intrinsic value of an option is:
(p.
Question
66 The
intrinsic
value of an
option is:)
A. the same as the option premium.
B. the amount the option is actually worth if it is immediately
exercised.
C. the amount the option is likely to be worth on its expiration

date.
D impossible to determine given the lack of information on the

. future prices of the underlying asset.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
67. A call option is regarded as being in-the-money if:
(p.
Question
67 A call
option is
regarded
as being ...)
A. it is written on a Treasury bond or another money market
instrument.
B. it has increased in value since it was first

written.
C. the price of the underlying asset is currently greater than the

strike price.
D the price of the underlying asset is currently greater than the
. strike price plus the option premium.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
68. In the options markets a put option is said to be in-the-money if the:
(p.
Question
68 In the
options
markets a
put option
is said ...) A. exercise price is less than the share price.
B. exercise price is greater than the share

price.
C. exercise price is equal to the share

price.
D. price of the put is higher than the price of the call.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
69. In the options markets a put option is said to be out-of-the money if the:
(p.
Question
69 In the
options
markets a
put option
is said ...) A. exercise price is less than the share price.
B. exercise price is greater than the share

price.
C. exercise price is equal to the share

price.
D. price of the put is higher than the price of the call.

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
70. In the options markets for a covered option, the:
(p.
Question
70 In the
options
markets for
a covered
...) A. option premium never alters from the intrinsic value.
B. strike price is always above the exercise price.
C. seller owns the underlying

asset.
D. seller does not have an interest in the underlying

asset.
Difficulty: Medium
Est time: <1 minute
71. In the options markets a put option is regarded as being in-the-money if:
(p.
Question
71 In the
options
markets a
put option
is ...) A. it is written on a Treasury bond or another money market
instrument.
B. it has increased in value since it was first

written.
C. the price of the underlying asset is currently less than the strike
price.
D the price of the underlying asset is currently less than the

. strike price plus the option premium.
Difficulty: Medium
Est time: <1 minute

72. Which of the following factors would tend to increase the size of the premium on
an options contract?
(p.
Question
72 Which
of the
following
factors
would tend
...)
A. The current short-term interest rates are
high
B. The option is near its expiration date
C. The price volatility of the underlying asset is low
D. The option is far off its expiration

date
Difficulty: Medium
Est time: <1 minute

73. The value of a put option rises when the underlying asset:
(p.
Question
73 The
value of a
put option
rises when
the ...) A. has reduced
volatility.
B. has relatively short

maturity.
C. experiences price
increases.
D. experiences price
falls.
Difficulty: Medium
Est time: <1 minute

74. Which of the following variables affect the value of options?
(p. i. Difficulty of interest rates

Question
74 Which
of the ii. Time to maturity of the option
following
variables
affect the
iii. Share price volatility
...)
iv. Dividend yield on the underlying share
A. i and iv
only
B. ii and iii only
C. i, ii and iv
only
D. i, ii, iii and

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

75. Which of the following factors is NOT generally regarded as a major determinant
of the price of an option?
(p.
Question
75 Which
of the
following
factors is
NOT ...)
A. The spot price of the underlying asset, relative to the option exercise
price
B. The elapsed time since the start of the

option
C. The volatility of the spot price of the underlying

asset
D. The level of interest rates
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

76. All of the following factors affect the price of a share option except the:
(p.
Question
76 All of
the
following
factors
affect the A. riskiness of the share.
...)
B. risk-free
rate.
C. time to expiration.
D. expected rate of return on the share.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
77. In relation to options when interest rates increase, the:
(p.
Question
77 In
relation to
options
when
interest A. price of call options generally falls.
rates ...)
B. price of the underlying share usually increases.
C. price of put options generally falls.
D. volatility of the underlying asset falls.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
78. In relation to options when interest rates decrease, the:
(p.
Question
78 In
relation to
options
when
interest A. price of call options generally increases.
rates ...)
B. price of the underlying share usually

decreases.
C. price of put options generally

increases.
D. volatility of the underlying asset falls.

Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
79. The strategy whereby a company buys an interest rate option that puts a
maximum level on the interest rate for its borrowing is a:
(p.
Question
79 The
strategy
whereby a
company
buys an ...)
A. limit
option.
B. cap
option.
C. boundary
option.
D. ceiling
option.
Difficulty: Medium
Est time: <1 minute

80. In option language, a ‘cap' is a:
(p.
Question
80 In
option
language,
...)
A. boundary
option.
B. ceiling
option.
C. floor option.
D. perimeter
option.
Difficulty: Medium
Est time: <1 minute

81. The strategy whereby a company sells an interest rate option that puts a minimum
level on how low an interest rate may fall is a:
(p.
Question
81 The
strategy
whereby a
company
sells an ...)
A. boundary
option.
B. limit
option.
C. floor option.
D. perimeter
option.
Difficulty: Medium
Est time: <1 minute

82. The option that is a combination of a cap option and a floor option is a:
(p.
Question
82 The
option that
is a
combinatio
n of a cap A. boundary
...)
option.
B. collar
option.
C. band option.
D. range
option.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

83. If a risk manager wants to put on an upper limit on an interest rate payable on a
future borrowing by buying an option and at the same time he wants an option
(p.
Question that puts a minimum limit on how low interest rate payable may fall, this
83 If a risk combination is called:
manager
wants to
put on an
upper ...)
A. a
cap.
B. a
floor.
C. a
collar.
D. a
wrap.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

84. An investor purchased a call option and wrote a put option at an exercise price
lower than that of the long call option. The strategy is known as a:
(p.
Question
84 An
investor
purchased
a call
option and
...)
A. long
straddle.
B. horizontal bull spread.
C. vertical bull spread.
D. short straddle.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 20.5 Develop options strategies that are appropriate to hedge price risk, including single-option strategies and
combined-option strategies, and discuss the advantages and disadvantages of option contracts for the management of risk.
Section: 20.5 Option risk management strategies

85. An investor purchased a call option and wrote a call option at an exercise price
higher than that of the long call option. The strategy is known as a:
(p.
Question
85 An
investor
purchased
a call
option and
...)
A. call bull spread.
B. long
straddle.
C. horizontal bull spread.
D. short straddle
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

86. An investor purchased a put option and wrote a call option at an exercise price
higher than that of the long put option. The strategy is known as a:
(p.
Question
86 An
investor
purchased
a put
option and
...)
A. long
straddle.
B. horizontal bear
spread.
C. short straddle.
D. vertical bear
spread.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

87. An investor purchased a put option and at the same time wrote a put option at an
exercise price lower than that of the long put option. The strategy is known as a:
(p.
Question
87 An
investor
purchased
a put
option and
at ...)
A. long
straddle.
B. bull spread.
C. put bear spread.
D. short straddle.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

88. If a share investor with quite a bearish outlook but also wants to hedge against a
price rise, then they could undertake a:
(p.
Question
88 If a
share
investor
with quite a
bearish ...)
A. long
straddle.
D. put bear straddle.
Difficulty: Hard
Est time: <1 minute
89. An investor with a very bearish attitude can limit their attitude by:
(p.
Question
89 An
investor
with a very
bearish
attitude ...) A. long
straddle.
D. short straddle.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
90. In expectation of increased price volatility, an investor purchased a call option

and at the same time bought a put option with common exercise prices. The
(p.
Question strategy is known as a:
90 In
expectation
of
increased
price ...)
A. horizontal spread.
B. vertical spread.
C. short straddle.
D. long
straddle.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
91. If an investor with a somewhat bearish attitude owns some shares but does not as
yet want to sell, then they can limit their downside exposure to a price fall by:
(p.
Question
91 If an
investor
with a
somewhat
bearish ...)
A. engaging in a vertical bull spread.
B. by writing a call option on the shares.
C. by engaging in a call bull spread.

D. by engaging in a put bear spread.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
92. In expectation of increased price volatility, an investor purchased a call option

and at the same time bought a put option, both with out-of-the-money exercise
(p.
Question prices on the same underlying asset. The strategy is known as a:
92 In
expectation
of
increased
price ...)
A. horizontal spread.
B. vertical spread.
C. short strangle.
D. long
strangle.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
93. In expectation of increased price stability, an investor sells a call option and at
the same time sells a put option with common exercise prices on the same
(p.
Question underlying asset. The strategy is known as a:
93 In
expectation
of
increased
price
stability,
...)
A. vertical spread.
B. horizontal spread.
C. short straddle.
D. long
straddle
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
94. When we contrast futures with options contracts, we can say that:
(p.
Question
94 When
we contrast
futures with
options ...)
A. in a futures contract, the buyer and seller have asymmetric rights,
whereas in an options contract the buyer and writer have symmetric
rights.
B. in a futures contract the buyer and seller have symmetric rights,

whereas in an options contract the buyer and writer have
asymmetric rights.
C for both futures contracts and options contracts the buyer and
. writer have symmetric rights.
D for both futures contracts and options contracts the buyer

. and writer have asymmetric rights.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
95. Options are contracts that give the purchaser the obligation to buy or sell an
underlying asset.
(p.
Question
95 Options
are
contracts
that give
FALSE
the ...)
Options are contracts that give the purchaser the right to buy or sell an underlying
asset.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
96. A put option gives the owner the obligation to sell the underlying security.
(p.
Question
96 A put
option FALSE
gives the
owner the
obligation A put option gives the owner the right to sell the underlying security.
...)
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
97. The seller of an option has the obligation to buy or sell the underlying asset.
(p.
Question
97 The
seller of an TRUE
option has
the
obligation
...)
The seller or writer is obliged to carry out the contract for which they demand a
premium to compensate them for the risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
98. In the options market the short-call party has the right to sell shares at a specified
price.
(p.
Question
98 In the
options
market the
short-call
FALSE
party ...)
The short-call party has the obligation to sell shares at a specified price, not the
right.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute

99. If a buyer of a particular share purchased a call option on it at a strike price of
$15 and the share is selling for $12 on the expiration date, the call option is worth
(p.
Question $0.
99 If a
buyer of a
particular
share
purchased TRUE
...)
The option has expired out-of-the money as the strike price is more than the
actual price.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
100. A long-call party would exercise a call option with an exercise price of $9.00 and
a premium of $1.50 if the current price of the underlying physical market asset is
(p.
Question $8.00.
100 A long-
call party
would
exercise a
call ...) FALSE
The physical asset price needs to move upwards to $11.00 to be in the money.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute
101. A short-call party to a call option with an exercise price of $10.00 and a premium
of $1.00, if the current price of the underlying asset is $8.00 on the exercise date,
(p.
Question would make a loss of $1.00
101 A
short-call
party to a
call option
with ...) FALSE
Given V = P - max(S-X, 0) they would make a profit of $1.00.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

102. The value of a put option rises when the underlying asset experiences price
declines.
(p.
Question
102 The
value of a
put option
rises when
TRUE
the ...)
A put option gives the holder the right to sell at a specified price.
Difficulty: Medium
Est time: <1 minute
103. The intrinsic value of an option is the amount the option is expected to be worth
on its expiration date.
(p.
Question
103 The
intrinsic
value of an
option is
FALSE
the ...)
The intrinsic value is the market price of the underlying asset relative to the
option exercise price.
Difficulty: Medium
Est time: <1 minute

104. If interest rates increase the value of a put option declines.
(p.
Question
104 If
interest TRUE
rates
increase
the value of There is a greater opportunity cost if one assumes the holder of the put owns the
a ...)
underlying asset.
Difficulty: Medium
Est time: <1 minute
105. Under certain circumstances an options contract may be a preferred hedging

instrument. Discuss.
(p. Question
105 Under
certain
circumstance
s an options
...)
As an options contract gives the option buyer the right, but not the obligation, to
buy or sell a specified commodity or financial instrument at a predetermined
price on or before a specified date, if it is not in the option buyer's best interest it
need not be exercised. So an option buyer will not exercise a right to sell if the
physical market price is above the exercise price of the option. Likewise an
option buyer will not exercise the right to buy if the physical market price is
below the exercise price of the option. The buyer of an options contract has paid
a premium for the flexibility of the option and the hedging of uncertain
outcomes.
Bloom's: Synthesis
106. Discuss a call option writer's risk exposure and some strategies they might use to
minimise any possible loss exposure.
(p.
Question
106
Discuss a
call option
writer's ...)
The writer of a call option is exposed to potentially unlimited loss if the spot
share price increases indefinitely. Given that the maximum profit that is made by
the writer is from the receipt of the premium, once the option is in-the-money the
writer's premium is reduced or turned into a loss. If it appears that the spot price
is increasing, it is expected that the option writer would immediately close out a
negative position or maintain a covered position obtained by owning the actual
shares before the price rise began.
Bloom's: Synthesis
107. Discuss some characteristics of writers of covered and uncovered call options.
(p. Question
107 Discuss
some
characteristic
s of writers of
...)
For an exchange-traded option the writer will typically need to meet margin
requirements, unless a covered option is written guaranteeing that the writer of
the option can complete the contract should the holder decide to exercise the
option. This would be the case for a writer who owned a sufficient quantity of
the underlying asset, such as listed shares, to meet the requirement. Another
alternative for a covered call is if a third party provides a guarantee that the
option writer may borrow from them the underlying asset on or before the
option contract settlement date. Another cover arrangement would be when a
call option writer was the holder of a call option in the same asset but with a
lower exercise price. If a writer did not have cover, as previously mentioned,
they are considered to have written an uncovered call. Recently, the rules on
covered and uncovered short selling have been tightened dramatically owing to
the turmoil in global financial markets.

108. Option markets have some basic organisation features. Discuss
(p.
Question
108 Option
markets
have some
basic
organisatio Option markets now operate in the major financial centres around the world.
n ...)
Prior to 1973 and the creation of the Chicago Board Options Exchange (CBOE),
option contracts were private contracts between parties. However, market trading
of standardised contracts was stimulated by the establishment of the CBOE and
the adoption of formal trading practices and similar exchanges developed quite
quickly around the world. The organisation of options markets is similar to
futures. All exchange-traded options contract transactions are recorded by a
clearing house. Once the clearing house has entered as the counterparty to both
the seller and buyer of the option the options clearing house guarantees the
performance of all contracts. It also handles the assignment of option contract
exercise notices submitted by buyers.
109. Discuss briefly the two common option contracts for shares and options on
futures contracts that are available through the AASX Trade 24.
(p.
Question
109
Discuss
briefly the
two
common ...)
The Australian Securities Exchange (ASX) offers exchange-traded contracts
through its subsidiary, the ASX Trade 24. Option contracts on underlying futures
contracts include 90-day bank-accepted bills futures contracts, S&P/ASX 200
Index futures contracts and three-year, and 10-year Treasury bonds futures
contracts. There are also share options with varying exercise prices on leading
company ordinary shares.
Chapter 21
1. An interest rate swap is:
A. another name for a call

option.
B. another name for a put option.
C an agreement between two or more persons to exchange cash

. flows over some future period.
D the name for the exchange of a bond futures contract for an

. option contract.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

Learning Objective: 21.1 Describe the nature of a swap contract and explain the structure and operation of vanilla and basis interest
rate swap contracts within the context of comparative advantage. Structure and calculate an interest rate swap.
2. When two parties exchange their respective interest payments associated with
existing debt borrowed in the capital markets, this is called a/an:
A. interest exchange.
B. financial switch.
C. swap.
D. financial
transfer.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
3. Which of the following about interest rate swaps is NOT correct?
A. An interest rate swap allows a company to change the net characteristics

of its interest rate cash flows.
B. An interest rate swap is based on interest rates worked out on a

notional principal.
C If a company has a fixed-rate loan it can enter into an interest rate

. swap whereby the bank lender will pay it a variable rate to net out
the fixed rate from the company.
D A cross-currency swap involves the exchange and interest

. payments based on a fixed exchange rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
4. A financial agreement between two parties to exchange a series of cash flows
similar to those resulting from an exchange of different types of bonds is called
a/an:
A. credit
swap.
C. yield curve
swap.
D. notional
spread.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
5. The growth of the interest rate swaps market has been due to firms wanting to:
A. lower the cost of funds.
B. hedge interest rate

risk.
C. lock in profit
margins.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
6. The advantages(s) for a company to use an interest rate swap is:
A. it may lower the cost of funds if comparative advantages

exist.
B. it may hedge interest rate risk.
C. it may gain access to otherwise inaccessible debt markets.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
7. An interest rate swap is similar to which of the following transactions?
A. Borrowing money at one floating rate and lending it at a higher floating

rate
B. The purchase of a share and the sale of a bond
C. A series of forward rate agreements

(FRAs)

Difficulty: Medium
Est time: <1 minute
Learning Objective: 21.2 Understand the reasons why interest rate swap markets have become significant within the global financial
markets, including their role in facilitating speculation.
8. A credit default swap means:
A. initial payment of a periodic premium by the buyer of a credit default

swap.
B. the buyer of a credit default swap obtains protection against credit

risk exposures associated with specified debt issues.
C if the specified debt issuer defaults then the credit default swap
. protection seller assumes the risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
9. The size of one basis point is:
A. 0.01
B. 0.001
C. 0.0001
D. 0.00001
Difficulty: Medium
Est time: <1 minute
Section: 21.1 Interest rate swaps

10. One hundred basis points equal:
A. 100
%
B. 10
%
C. 1
%
D. 0.1
%
Difficulty: Medium
Est time: <1 minute

11. The two parties contracting to exchange their respective interest payments in an
interest rate swap are formally called:
A. options
holders.
B. counterparties.
C. exchange
parties.
D. long and short

positions.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

12. When two parties agree to exchange a set of interest rate cash flows based on a
notional principal, this transaction is called:
A. cross-hedging.
C. cash flow swap.
D. fixed-for floating swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
13. The fictional principal on which an interest rate swap is based is called the:
A. swap dealer's call

rate.
B. notional
principal.
C. LIBOR.
D. basis rate.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
14. In an interest rate swap, the notional principal:
A. is the principal relating only to the fixed rate

payer.
B. is the principal relating only to the floating rate

payer.
C. does not receive any interest

payments.
D. is equal to the amount of the underlying debt
borrowed.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
15. In an interest rate swap, the party who is the fixed-rate payer:
A. currently has fixed-rate obligations, but prefers floating.
B. currently has floating-rate obligations, but prefers fixed.
C. receives a fixed-rate payment if interest rates

increase.
D. pays a floating-rate payment if interest rates

increase.
Difficulty: Medium
Est time: <1 minute
16. In relation to an interest rate swap transaction when the two parties are each
entering into a swap to manage a particular interest rate risk exposure, this is called
a:
A. bank swap.
B. direct
swap.
C. intermediated swap.
D. credit
swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

17. In relation to an interest rate swap transaction when the one of the two parties is a
financial institution this is called a:
A. bank swap.
B. direct
swap.
C. intermediated swap.
D. credit
swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

18. The main type of interest rate:
A. is a direct swap between two

parties.
B. is known as a vanilla
swap.
C. is a basis swap.
D. involves a swap of floating for floating interest

payments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

19. The main type of interest rate:
A. is a direct swap between two

parties.
B. involves accompany entering into a swap with a financial

intermediary whereby the company swaps fixed for floating
payments.
C. is a basis swap.
D. involves a swap of floating for floating interest

payments.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

20. In a vanilla interest rate swap:
A. the amounts payable between parties depend on a specified principal that

is exchanged at the outset.
B. one party pays another party an amount calculated according to a

floating interest rate on a notional principal, in exchange for an
amount calculated on the basis of a fixed interest rate.
C only interest flows are exchanged until maturity, when the

. principal is exchanged according to the difference in the interest
rates over the lifetime of the swap.
D the amounts payable between parties depends on a specified

. principal that is exchanged at the beginning and at the end.
Difficulty: Medium
Est time: <1 minute

21. If a company that had a fixed-rate liability wanted to achieve a floating-rate cost of
funds through a swap, it would pay a:
A. fixed rate to the counterparty and receive a floating rate in return from the
counterparty.
B. floating rate to the counterparty and pay a floating rate to the fixed-
rate lender.
C. floating rate to the counterparty and pay a fixed rate to the fixed-
rate lender.
D floating rate to the counterparty and receive a fixed rate in

. return from the counterparty.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

22. If a company that had a floating-rate liability wanted to enter into a swap to
achieve a fixed-rate cost of funds, it would pay a:
A. fixed rate to the counterparty and receive a floating rate in return from the
counterparty.
B. floating rate to the counterparty and pay a floating rate to the fixed-
rate lender.
C. floating rate to the counterparty and pay a fixed-rate to the fixed-

rate lender.
D floating rate to the counterparty and receive a fixed-rate in

. return from the counterparty.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

23. In an interest rate swap, ______ gains/gain when the three-month BBSW rises.
A. the floating-rate
payer
B. the fixed-rate
payer
C. both floating- and fixed-rate payers
D. neither floating- nor fixed-rate payers
Difficulty: Medium
Est time: <1 minute
24. In an interest rate swap ______ gains/gain when the three-month BBSW falls.
A. the floating-rate
payer
B. the fixed-rate
payer
C. both floating- and fixed-rate payers
D. neither floating- nor fixed-rate payers
Difficulty: Medium
Est time: <1 minute
25. If a company with a fixed-rate debt of 11% enters into a swap and pays floating-
rate debt of 8% and receives fixed-rate payments of 9%, its net cost of debt
becomes:
A. 9
%
B. 10
%
C. 11
%
D. 12
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
Section: 21.2 Rationale for the existence of interest rate swaps
26. If a company with a fixed-rate debt of 11% enters into a swap and pays floating-
rate debt of BBSW+1.20% and receives fixed-rate payments of 9%, its net cost of
debt becomes:
A. 11
%
B. BBSW+0.20%
C. BBSW+2.20%
D. 12
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
27. Which of the following statements regarding interest rate swaps is incorrect?
A. In contrast with a forward contract, the exact terms of exchange of an

interest rate swap will change with interest rates.
B. The two parties exchange net interest difference in an interest rate

swap.
C An interest rate swap is similar to a forward contract in that it

. guarantees the exchange of two items of value at some future
point in time.
D The two parties in an interest rate swap generally have the
. same level of default risk.
Difficulty: Medium
Est time: <1 minute
28. When a financial intermediary is involved as an interest rate swap counterparty, it

often seeks to arrange an offsetting swap called a:
A. counterparty swap.
B. simultaneous
swap.
C. synchronised
swap.
D. matched
swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
29. These days, the majority of swaps require a/an _______ to act as an intermediary.
A. commercial bank
B. investment
bank
C. merchant bank
D. Any of the given choices

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
30. A key motive for companies and financial institutions to participate in an interest
rate swap is:
A. the low information costs of swaps, compared with other financial

derivatives.
B. to transfer interest-rate risk to parties more willing to bear it.
C. the greater liquidity of swaps, compared with other financial

derivatives.
D the favourable tax implications of swaps, compared with other

. financial derivatives.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

31. Which of the following is NOT an advantage of having an interest rate swap
market?
A. As it is generally liquid, it benefits both borrowers and

lenders.
B. As most swaps involve banks, their credit departments can carry out
credit assessments more easily than potential lenders.
C As the banks are involved in most swaps, banks require a spread

. between the two interest rates.
D. Swaps enable companies to carry out regulatory and tax

arbitrage.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

32. Which of the following statements is NOT an advantage of a swap transaction?
A. It usually allows the company to achieve a lower cost of

funds.
B. It is used to hedge both interest rate risk and foreign exchange risk.
C. It facilitates the restructuring of cash flows associated with

existing borrowings.
D. It transfers the credit risk to the

counterparty.
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute

A. The principal involved is called

notional.
B. Parties involved borrow funds where they have a comparative

advantage.
C The two parties in the swap always share equally the cost of the
. spread that the intermediary receives.
D The financial intermediary involved often engages in an

. offsetting swap, known as a matched swap.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

34. Which of the following is a way to change the basic structure of a swap?
A. Vary the notional principal over the lifetime of the

swap.
B. Change the timing of when the swap begins or

ends.
C. Reverse the swap if market conditions

change.

correct.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

35. An interest rate swap in which all the fixed payments are paid in one lump sum is
called a/an:
A. amortised swap.
B. term
swap.
C. zero-coupon swap.
D. none of the given choices.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

36. An interest rate swap in which the notional principal declines over time is called
a/an:
A. amortised swap.
B. term
swap.
C. zero-coupon swap.
D. none of the given choices.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

37. An interest rate swap that obligates traders to enter a swap at some date in the
future, with terms agreed today, is a:
A. term
swap.
B. forward swap.
C. flexible swap.
D. long
swap.
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute

38. In a swap arrangement, both parties may be able to receive more favourable
funding rates than they would have done without the swap, and the swap dealer
receives a spread as well. Where does the cost saving originate from?
A. The bank swap dealer effectively guarantees payments of all

obligations.
B. The parties involved in the swap are able to borrow where each has a
relative cost advantage.
C The party paying floating cash flows always pays less than the
. party paying fixed cash flows.
D With the bank always acting as a swap counterparty, each

. party is able to reduce the risk profile.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

39. If one company has better access to fixed-term financing than another company, it
may be said that this company has a _____ than the other company.
A. lower credit
rating
B. comparative advantage
C. greater market share
D. higher credit
risk
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

40. If two firms have the following cost of borrowing, what is the net differential for
an interest rate swap?
Firm A: fixed rate 10.8% per annum; floating rate BBSW+0.3% per annum
Firm B: fixed rate 11.6% per annum; floating rate BBSW+1.7% per annum
A. 2.2
%
B. 1.4
%
C. 0.7
%
D. 0.6
%
AACSB: Analytic
Bloom's: Analysis
Difficulty: Medium
Est time: <1 minute

41. An investment bank is to advise two client companies on the establishment of a
mutually beneficial swap facility. Both companies are able to access funding
within the fixed interest rate debt markets and the floating interest rate debt
markets. However, company X has a comparative advantage over company Y
within one of the debt markets. Based on the following data, what is the
comparative advantage of company X?
Company X: fixed rate 10.8% per annum; floating rate BBSW+ .3% per annum
Company Y: fixed rate 11.5% per annum; floating rate BBSW+1.7% per annum
A. Fixed interest rate debt market, 0.7% per annum
B. Floating interest rate debt market, 1.4% per annum
C. Fixed interest rate debt market, 10.8% per annum
D. Floating interest rate debt market, BBSW + 0.3% per

annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

42 Using the data below, calculate the fixed interest rate payable by company B in the
. swap transaction.
A. 11.075% per
annum
B. 11.275% per
annum
C. 11.325% per
annum
D. 11.550% per
annum
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute

43. Which of the following may be said to create a debt market environment, whereby
one company may obtain a comparative interest rate advantage over another
company in the fixed interest rate market, compared with the floating interest rate
market?
A. The existence of market segmentation between the fixed and floating rate
markets.
B. Typically, fixed-rate market risk premiums are based on external

credit rating agency reports.
C Professional institutional lenders, such as banks and merchant

. banks, apply their own internal credit risk premiums.
D. All of the given

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

44. Ossie Ltd is about to establish a new funding arrangement. It is able to borrow in
either the fixed-rate or floating-rate debt markets. The company wishes to lower its
cost of borrowing by entering into a swap transaction with Battler Ltd. Based on
the following data for the two companies, in which interest rate market will Ossie
Ltd borrow, and swap into?
Ossie Ltd fixed rate 10.8% per annum; floating rate BBSW+0.3% per annum
Battler Ltd fixed rate 11.5% per annum; floating rate BBSW+1.7% per annum
A. Borrow at fixed interest rate; swap into floating

rate
B. Borrow at floating interest rate; swap into fixed

rate
C. Borrow at fixed interest rate; no advantage in swap

transaction
D. Borrow at floating interest rate; no advantage in swap

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

45. Bosie Ltd is about to establish a new funding arrangement. It is able to borrow in
either the fixed-rate or floating-rate debt markets. The company wishes to lower its
cost of borrowing by entering into a swap transaction with Matlock Ltd. Based on
the following data for the two companies, in which interest rate market will
Matlock Ltd borrow, and swap into?
Bosie Ltd fixed rate 10.8% per annum; floating rate BBSW+0.3% per annum
Matlock Ltd fixed rate 11.5% per annum; floating rate BBSW+0.7% per annum
A. Borrow at fixed interest rate; swap into floating

rate
B. Borrow at floating interest rate; swap into fixed

rate
C. Borrow at fixed interest rate; no advantage in swap

transaction
D. Borrow at floating interest rate; no advantage in swap

transaction
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
46. A bank has intermediated a matched swap facility with two client companies.
Which of the following statements best describes a matched swap?
A. The role of the bank is that of an agent in bringing the two companies
together.
B. The notional principal amounts are exchanged and matched by

currency and maturity.
C. The bank as intermediary effectively engineers separate offsetting

contracts.
D. All of the given

answers.
Difficulty: Medium
Est time: <1 minute

47. An interest rate swap can effectively be hedged against interest rate risk by:
A. selling out to another

party.
B. entering into another swap agreement that has the opposite

transactions to the first swap.
C. setting floating-rate obligations equal to fixed-rate

obligations.
D. matching durations of assets and

liabilities.
Difficulty: Medium
Est time: <1 minute

48. Which of the following is considered a factor on the supply side in the growth of
the swaps market?
A. Interest rate swaps provide a linkage between segmented markets.
B. Interest rate swaps can minimise the costs of regulation and tax laws.
C The efficiency and technology of financial intermediaries in

. providing risk management.
D. All of the given

answers.
Difficulty: Medium
Est time: <1 minute

49. Growth in the interest rate swaps market has occurred as a consequence of:
A. companies looking for ways to manage risk or lower total funding

costs.
B. swaps creating a link between segmented markets.
C. swaps minimising the costs of regulation and tax laws.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
50. For an ordinary interest rate swap already in place, if counterparty A's obligation
for one year is $100 000 and counterparty B's obligation is $120 000:
A. counterparty A will pay counterparty B $20

000
B. counterparty A will pay counterparty B $100
000
C. counterparty B will pay counterparty A $20

000
D. counterparty B will pay counterparty A $120

000
AACSB: Analytic
Difficulty: Medium
Est time: <1 minute
i. Swaps may be used to achieve a lower cost of funds for a company.
ii. In an interest rate swap, the two parties swap the principal amount plus the
ongoing associated interest obligations.
iii. An intermediated swap is said to be ‘matched' when a bank enters into swaps
with both firms involved in an interest rate swap.
iv. A ‘plain vanilla' swap is the fixed AUD to floating AUD swap.
v. If an intermediary is involved in a swap between two parties, the intermediary

will also provide the initial loan to both parties.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

i. Swaps may be used to achieve a lower cost of funds for a company.
ii. In an interest rate swap, the two parties swap the principal amount plus the
ongoing associated interest obligations.
iii. An intermediated swap is said to be ‘matched' when a bank enters into swaps
with both firms involved in an interest rate swap
iv. A ‘plain vanilla' swap is the fixed AUD to floating AUD swap.
v. If an intermediary is involved in a swap between two parties, the intermediary

will also provide the initial loan to both parties.
B. ii, iii, iv and v are

true
C. ii, and iv are true
D. i and iii are

true
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
53. Interest rate swap transactions may be used by a multinational corporation as part
of a funding strategy to:
A. lower the cost of borrowing, using a comparative advantage in a

particular debt market.
B. spread debt issues across a range of

currencies.
C. diversify funding sources across a range of debt markets.
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute

54. A company is concerned that the cost of its long-term debt facilities is based on a
fixed interest rate that is considerably above current market rates, and that rates
will continue to fall. The company decides to use a swap to manage its risk
exposure. using the data provided below, which of the following statements is
incorrect?
Data:
Existing debt fixed interest rate: 13.50% per annum
Current long-term fixed swap rate: 11.75% per annum
Current long-term floating swap rate: BBSW+0.50% per annum
A. The company has created a synthetic fixed rate

liability.
B. Short-term interest rates are expected to remain below the existing

fixed cost of debt.
C The effective cost of borrowing is lower, as long as BBSW

. averages less than 11.25% per annum.
D This strategy assumes a ‘normal' yield curve, on average, over

. the life of the swap.
AACSB: Analytic
Bloom's: Analysis
Difficulty: Hard
Est time: <1 minute
55. If the exchange rate alters during the lifetime of a cross-currency swap, this:
A. has no impact as all FX risk has been eliminated.
B. will impact only on the interest payments during the swap's lifetime.
C. will impact only when the principal amounts are re-exchanged at

maturity.
D. will impact on both interest payments and principal

repayments.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 21.3 Examine the structure of a cross-currency swap and show the circumstances under which cross-currency
swaps may be arranged. Structure and calculate a cross-currency swap.
Section: 21.3 Cross-currency swaps

56. As a foreign exchange hedge, cross-currency swaps have all of the following
features, except:
A. each party pays the other's interest

payment.
B. principal amounts are reversed at a pre-specified rate at

maturity.
C an initial exchange of the two principal amounts by the two

. parties in the two different currencies.
D. principal amounts are reversed at the spot rate at

maturity.
Difficulty: Medium
Est time: <1 minute

57. Which of the following statements regarding a cross-currency swap is incorrect?
A. There is an exchange of principal amounts between counterparties at the

beginning and end of the swap.
B. The re-exchange at the conclusion of a cross-currency swap usually

takes place at the initial exchange rate.
C. As the cross-currency swap is arranged through a bank, there is

no credit risk.
D Once the cross-currency swap rate is determined, cash flows

. are known with certainty.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

58. An Australian company has issued USD paper into the US debt markets. The
company is investigating the possibility of entering into a cross-currency swap.
Which of the following generally form the basic mechanics of a cross-currency
swap?
i. Re-exchange of principal normally takes place at the same exchange rate as that
used at the commencement of the swap.
ii. At the conclusion of the swap, principal amounts are re-exchanged.
iii. Principal amounts, in the currency of debt, are exchanged at the start of the
swap.
iv. Interest payment commitments are swapped.
v. Involves the exchange between two parties of debt denominated in one currency,
for debt denominated in another currency.
A. i, ii, iii, v
B. ii, iii, iv,

v
C. i, ii, iii, iv,

v
D. i, ii, iii,
iv
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute

59. One of the key motives for a cross-currency swap is:
A. the need to evade the domestic country's regulations.
B. the need to obtain the actual use of the foreign

currency.
C. to gain risk exposure.
D. to make money from interest rate differences between

countries.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

60. Interest rate swaps and cross-currency swaps permit a counterparty to exchange a:
A. floating interest rate payment or currency value for a lower floating

payment value over the term.
B. fixed interest rate position for a currency position over the contract
term.
C floating interest rate payment or currency value for a fixed

. payment value over the contract term.
D fixed interest rate payment or currency value for a fixed value

. over the contract term.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 21.4 Explain the rationale for the existence of the cross-currency swap markets.
Section: 21.4 Rationale for the existence of currency swaps

61. The advantage of over-the-counter products such as swaps or forwards contracts,
relative to exchange-traded products such as options or futures, is:
A. standardisation.
B. regulation.
C. flexibility
.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

i. Swaps can be used to create a synthetic floating rate debt for a company's fixed
rate debt.
ii. If an intermediary has arranged a matched swap, it has no net exposure to

interest rate risk.
iii. A cross-currency swap differs from an interest rate swap in that, for a cross-
currency swap, the principals, as well as the agreed interest obligations, are
swapped for the duration of the swap agreement.
iv. With a cross-currency swap, the exchange rate used at the principal re-exchange
date is based on the current spot rate at that time.
v. If a bank acts as an intermediary in a swap and does not fund the swap parties'
underlying loan facilities, it has no obligation under the bank capital adequacy
requirements.
How many of the statements are true and how many are false?
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

i. Swaps can be used to create a synthetic floating rate debt for a company's fixed
rate debt.
ii. If an intermediary has arranged a matched swap, it has no net exposure to

interest rate risk.
iii. A cross-currency swap differs from an interest rate swap in that, for a cross-
currency swap, the principals, as well as the agreed interest obligations, are
swapped for the duration of the swap agreement.
iv. With a cross-currency swap, the exchange rate used at the principal re-exchange
date is based on the current spot rate at that time.
v. If a bank acts as an intermediary in a swap and does not fund the swap parties'
underlying loan facilities, it has no obligation under the bank capital adequacy
requirements.
B. ii, iii and iv are

true
C. i, ii and iii are

true
D. i, ii, iii and v are
true
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
64. When a bond investor buys a credit default swap (CDS), they will:
A. pay a premium to the

seller.
B. receive compensation from the protection seller if a default
occurs.
C. retain their original bonds.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 21.5 Introduce the concept and identify the parties to a credit default swap.
Section: 21.5 Credit default swaps
65. Cash settlement for a credit default swap (CDS) means the:
A. protection buyer delivers the agreed notional value of the debt to the
protection seller.
B. protection buyer transfers the specified debt to the protection

seller.
C. protection seller pays a net cash amount to the protection

buyer.
D protection buyer delivers the face value of the debt to the
. protection seller.
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 21.5 Introduce the concept and identify the parties to a credit default swap.
Section: 21.5 Credit default swaps
66. Which of the following regarding the role of a financial intermediary in an interest
rate swap is incorrect?
A. Most swaps involve a financial intermediary as

counterparty.
B. The financial intermediary will most often seek to engage in an

offsetting swap.
C The intermediary makes its profit by maintaining a spread

. between the rates offered to the two counterparties.
D The financial intermediary, by establishing a matched swap,
. ends up with a positive net exposure in the swap market.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 21.6 Consider the credit and settlement risks associated with being an intermediary or counterparty to a swap
contract.
Section: 21.6 Credit and settlements risk associated with swaps
A. The practice of marking-to market is carried out in the swaps market

(similar to the futures market).
B. In contrast with a forward contract, the exact terms of exchange of a

swap will change with interest rates.
C The swap market is similar to the futures market in that if the
. market moves against the contract, a maintenance margin call is
required.
D. The two parties in a swap generally have the same level of

default risk.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
contract.
68. During a swap, the risk of one party not forwarding its payment while the other
party does fulfil its payment obligation is called:
A. Herstatt risk.
B. swap risk.
C. settlement risk.
D. repayment risk.
Difficulty: Medium
Est time: <1 minute
contract.
69. In order to reduce interest rate swap risk exposures, a financial intermediary may:
A. practise marking-to
market.
B. use margin calls.
C. ask for security

collateral.
Difficulty: Medium
Est time: <1 minute
contract.
70. If a party in a matched swap defaults, the financial intermediary faces:
A. credit
risk.
B. default
risk.
C. settlement risk.
D. default and settlement
risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
contract.
71. The risk owing to a timing difference in an interest rate swap transaction, when one
party defaults on a payment to another before the other realises it, is called:
A. basis risk.
B. mismatch
risk.
C. settlement risk.
D. front-end risk.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
contract.
72. When the normal relationship between fixed and floating interest rates alters in an
interest rate swap, this risk is called:
A. basis risk.
B. exchange
risk.
C. mismatch
risk.
D. front-end risk.
Difficulty: Medium
Est time: <1 minute
contract.
73. All of the following are factors that directly affect swap pricing, except:
A. the availability of extra

counterparties.
B. the credit risk of the swap

counterparty.
C. the term structure of interest

rates.
D. current government regulation.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
contract.

74. In order to measure and manage interest rate swap risk exposures, a financial
intermediary may:
A. practise marking-to
market.
B. seek security collateral.
C. require a written performance guarantee from the counterparty's

sponsor.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
contract.

75. If a company expects interest rates to increase, which of the following strategies
should the company consider?
A. A short interest rate

call
B. A swap involving paying fixed rate and receiving floating

rate
C. A short forward rate

agreement
Difficulty: Medium
Est time: <1 minute
contract.

76. While both the international and AUD swap markets have matured, growth may
still be expected. Which of the following factors is a determinant in the future
growth of the swaps markets?
A. Periodic nervousness from a lack of clear direction of interest

rates
B. Speculative trading transactions to take advantage of future price

movements
C Development of new, sophisticated products to hedge interest rate

. and currency risk
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
contract.

77. Interest rate swaps and cross-currency swaps:
A. appear on the balance sheets of commercial banks as current

assets.
B. appear on the balance sheets of commercial banks as current

liabilities.
C. appear on the balance sheets of commercial banks as long-term

liabilities.
D. do not appear on the balance

sheet.
Difficulty: Medium
Est time: <1 minute
contract.
78. A financial contract that obligates one party to exchange a set of payments it owns
for another set of payments owned by another party is called a cross call option.
FALSE
The contract is called an interest rate swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
79. An interest rate swap may be used by a company only able to borrow variable rate
funds to obtain favourable longer term funding from otherwise difficult to access
long-term debt markets.
TRUE
A firm that is only able to obtain funds at a variable rate can do a swap and change
the net interest rate characteristic to a rate closer to that of fixed-rate funding.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
80. An interest rate swap that involves two parties entering into agreements where
floating for floating interest rate payments is called a money market swap.
FALSE
This type of swap is known as a basis swap.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
81. A rise in LIBOR will benefit the fixed-rate borrowing party in an interest-rate swap
contract.
TRUE
The fixed-rate party has locked in their borrowing interest rate.

Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
82. When a company can borrow at a fixed rate of 8% per annum and a variable rate of
LIBOR + 0.60% per annum and another company can borrow at a fixed rate of 9%
per annum and a variable rate of LIBOR + 0.80 a profitable vanilla swap can be
arranged between them so that both their borrowing obligations can be lowered.
TRUE
The first company can borrow at the fixed interest rate where it has the greater
advantage.
AACSB: Analytic
Difficulty: Easy
Est time: <1 minute

83. For the majority of interest rate swaps, an intermediary is involved.
TRUE
The main type of interest rate swap is a vanilla swap through a financial
intermediary.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
84. When a firm has borrowed floating rate from a bank but at the same time has
entered into a fixed-price contract to manufacture goods, a fixed rate to variable
rate swap allows the firm to lock in its profit margin on goods manufactured if
interest rates rise.
FALSE
The firm needs a variable to fixed rate swap to fix its cost of funds.
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute

85. When two parties do a cross-currency swap involving floating rate interest
payments in one currency and fixed interest rate payments denominated in another
currency, the cash flows involved vary as the exchange rate changes.
FALSE
All cash flows are calculated at an exchange rate fixed at the start of the cross-
currency swap.
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
86. With a cross-currency swap the exchange rate used at the principal re-exchange
date at maturity is based on the exchange rate at the beginning of the swap.
TRUE
Using the rate that prevailed at the start allows a company to know with certainty
what its re-exchange of principal amounts will be.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
87. A CDS protection buyer is a lender who seeks protection from credit risk
associated with a particular debt issue and is willing to pay a premium to the CDS
protection seller.
TRUE
The CDS buyer is typically a financial institution that has provided a loan facility
to a borrower.
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute

88. Discuss possible reasons why interest rate swap markets have formed and grown.
Originally swaps were between parties who wanted to change the nature of their
cash flows such as from paying a fixed rate to a floating rate on debt and also took
advantage of parties' different borrowing abilities in different markets. The growth
of swaps is accounted for by their versatility from the viewpoint of both borrowers
and investors. Swaps may be used to hedge interest rate risk, FX risk and credit
risk associated with existing or expected transactions. By far the largest market is
in the area of interest rate swaps. For example, a company may fix its cost of funds
for a project and hedge its interest rate exposure.
Bloom's: Knowledge
89. Discuss the structure and cash-flows arrangement for the main type of interest rate
swap.
The main type of interest rate swap is called a vanilla swap, for example when a
company enters into a swap with a financial intermediary by swapping fixed for
floating payments. Initially the company has set up a variable-rate loan and then
enters into a swap contract with the bank. The hypothetical cash flows are: the
company will pay a fixed interest rate to the bank and receive a variable rate from
the bank as well as paying a variable interest rate to the borrowing facility. In
practice, the net cash-flow requirement is calculated and only that amount is paid.
Bloom's: Knowledge
90. Explain in the context of interest rate swaps what a matched swap is.
The majority of swaps involve a commercial bank, an investment bank or a

merchant bank acting as an intermediary. In an intermediated interest rate swap,
the intermediary will seek to enter into an offsetting swap, also known as a
matched swap, where the bank will enter into swaps with both firm A and firm B.
The bank will act as counterparty to firm A in one intermediated swap and,
separately, as counterparty to firm B in another intermediated swap contract. By
establishing a matched swap the intermediary, in effect, has no net exposure in the
market.
91. Discuss the use of interest rate swaps in hedging interest rate exposure.
The use of interest rate swaps may protect a company's borrowing costs. For
example, a company has an existing variable-rate loan and expects the variable rate
to rise during the term of the loan. Through a swap the company may pay a fixed
rate to the swap counterparty and receive a variable-rate payment from the
counterparty. If the variable interest rate does rise, this means the payment to the
variable rate lender will increase but this would be offset by the increase in the
variable-rate receipts from the swap counterparty. The company's fixed-rate
payment would remain the same.

92. As of December 2010 the Bank for International Settlements (BIS) estimated the
notional value of currency swaps was USD16 347 billion. Discuss possible reasons
for the growth in currency swaps.
First, the reasons for swaps apply. These are to lower the cost of funds, to gain
access to otherwise inaccessible debt markets, to hedge interest rate risk exposures
and to lock in profit margins on business transactions. The use of cross-currency
swaps allows hedging of FX risk exposures such as where companies have issued
debt instruments in a range of currencies. Parties to a cross-currency swap may be
able to establish a natural hedge by borrowing in one currency and swapping into a
currency being generated by its business operations.

FIM TB T NG H P

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Chapter 1

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

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

6. Buyers of financial claims lend their excess funds because they:

A. expect to borrow extra funds in the future.

A. by borrowing extra funds in the future.

8. A savings-surplus unit is an entity:

A. that needs to borrow funds from a surplus unit.

A. is hindered by the problem of ‘double coincidence of wants'.

11. Which of the following is NOT associated with characteristics of shares?

A. Part ownership of a company

13. Institutions that specialise in off-balance-sheet advisory services are called:

A. depository financial institutions.

A. money market corporations.

18. Which of the following is NOT a term associated with shares?

A. A specified, fixed return

A. A contractual claim against the borrower

24. Which of the following is NOT a feature of futures contracts?

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

25. Which of the following is NOT a feature of forward contracts?

A. Forward contracts are not standardised

27. Which of the following is NOT a feature of swaps?

A. There is a contractual arrangement to exchange cash flows

A. facilitate the exchange of financial assets.

30. The most important function of a financial market is to:

A. provide information about shares.

31. Financial markets:

A. act as intermediaries by holding a collection of assets and issuing claims based on

A. offers financial assets with the highest expected return.

33. A secondary financial market is one that:

A. offers financial assets with the highest expected return.

34. Purchasing shares on the Australian Securities Exchange is an example of:

A. a primary market transaction.

A. funds flow from the saver to the issuer.

36. Which of the following is NOT an example of primary market transactions?

A. A company issue of shares to raise funds for an investment project

37. A ‘primary market' is a market:

A. only for equity issues by major or ‘primary' companies.

A. a secondary market transaction.

39. The market where existing securities are sold is the:

A. funds flow indirectly from saver to borrower.

A. allow borrowers to raise long-term funds.

A. maintaining low interest rates.

43. Which of the following statements is NOT a feature of financial markets?

A. has a steadily increasing liquidity for most assets.

45. Financial markets:

A. act as intermediaries between borrowers and savers.

46. Direct financing allows a borrower to:

A. easily assess a lender's level of default risk.

A. Matching amounts of funds to be borrowed with those to be lent

48. An issue of debentures is an example of:

A. a secondary market transaction.

49. An example of an indirect form of funding is a/an:

A. Direct finance reduces financial institution' fees.

51. Financial intermediaries:

52. The flow of funds between lenders and borrowers is channelled:

A. indirectly through financial markets.

54. The main role of financial intermediaries is to:

A. borrow funds from surplus units and lend them to borrowers.

55. Financial intermediaries pool the funds of:

A. many small savers and make loans to a few large borrowers.

A. financial intermediaries offer the savers a wide portfolio of financial instruments.