Question 1

Which of the following is NOT a characteristic commonly associated with preference shares?

Accepted Answer

Preference shares generally have a higher ranking than common shares but not necessarily than bond holders on claims on assets.

Question 2

A financial institution that obtains most of its funds from deposits is a/an:

Accepted Answer

A commercial bank is a financial institution that primarily obtains its funds from deposits made by customers. Investment banks and unit trusts typically generate funds from investors through the sale of securities, while general insurers collect premiums from policyholders to cover potential losses.

Question 3

A financial intermediary that receives premium payments which are used to purchase assets to cover future possible payments is a:

Accepted Answer

A financial intermediary that receives premium payments and uses them to purchase assets to cover future possible payments is a life insurance office. Building societies, credit unions, and savings banks are not typically involved in the purchase of assets to cover future payments.

Question 4

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

Accepted Answer

The four principal attributes significant in the investment decision process for both real and financial assets are liquidity (how quickly and easily an asset can be converted into cash), risk (the uncertainty associated with the future returns of the asset), return or yield (the income generated by the asset), and the time pattern of future cash flows (when and how much cash flow the asset will generate over time).

Question 5

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

Accepted Answer

Finance companies typically raise the majority of their funds by selling securities in the money markets, as opposed to commercial banks and building societies which rely on deposits and loans for funding. Life insurance offices may also issue securities but this is not their primary source of funding.

Question 6

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

Accepted Answer

Investment banks are institutions that specialise in off-balance-sheet advisory services such as mergers and acquisitions, underwriting of securities, and corporate restructuring. They facilitate transactions between corporations, governments, and investors. Depository financial institutions such as banks, finance companies, and contractual institutions provide lending and deposit-taking services and may not necessarily specialise in off-balance-sheet advisory services.

Question 7

Short selling is:

Accepted Answer

Short selling is the sale of a financial product that the seller does not own, with the intention of buying it back later at a lower price and making a profit. This practice involves borrowing the financial product from someone else and selling it in the market, with the expectation of buying it back when the price has fallen.

Question 8

Financial institutions that are formed under a trust deed and attract funds by inviting the public to buy units are:

Accepted Answer

Unit trusts are financial institutions that are formed under a trust deed and attract funds by inviting the public to buy units. Finance companies, building societies, and life insurance offices operate differently and do not issue units to the public in exchange for funds.

Question 9

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

Accepted Answer

The role of money as a store of value refers to the fact that money allows worth to be stored readily. This means that money can be saved for future use and is generally accepted as a reliable means of storing value over time.

Question 10

Money increases economic growth by assisting transfers from:

Accepted Answer

Money facilitates the transfer of savings from individuals to businesses and other borrowers, which in turn increases economic growth as it fuels investment and consumption.

Question 11

Which of the following is NOT associated with characteristics of shares?

Accepted Answer

Shares are not associated with a fixed interest payment. Instead, they provide investors with the opportunity to earn dividends and capital gains based on the performance of the company.

Question 12

A savings-surplus unit is an entity:

Accepted Answer

A savings-surplus unit is an entity that has an income that exceeds its spending, meaning it has excess funds that can be saved or invested.

Question 13

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

Accepted Answer

Money serves as a universally recognized medium of exchange, facilitating the exchange of goods and services in a more efficient manner than barter or government transfers.

Question 14

Financial markets have developed to facilitate the exchange of money between savers and borrowers.Which of the following is NOT a function of money?

Accepted Answer

A claim to future cash flows is not a function of money. It is a function of financial instruments such as stocks or bonds. Money serves as a medium of exchange, a store of value, and a protection against inflation.

Question 15

Sellers of financial claims promise to pay back borrowed funds:

Accepted Answer

Sellers of financial claims rely on their expectation of having surplus funds in the future to pay back borrowed funds. They may have a plan or forecast that would allow them to generate enough revenue or income to pay back those funds, without resorting to borrowing extra funds or selling assets. However, this plan may not always work out as expected, which can lead to default or loss for the lender. Thus, lenders need to assess the creditworthiness and risk of the borrower before lending funds.

Question 16

Financial institutions whose liabilities specify that,in return for the payment of periodic funds to the institution,the institution will make payments in the future (if and when a specified event occurs)are:

Accepted Answer

Contractual savings institutions issue liabilities such as insurance policies, annuities or pensions where they promise to make future payments if a specified event occurs (e.g. death, retirement). Money market corporations are non-bank financial institutions that issue short-term debt to raise funds, unit trusts are investment funds and depository financial institutions accept deposits and provide loans.

Question 17

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

Accepted Answer

The process of facilitating the flow of funds between borrowers and lenders helps to increase the rate of economic growth of a country by providing financing for investment and consumption. This helps to stimulate economic activity and create job opportunities.

Question 18

Buyers of financial claims lend their excess funds because they:

Accepted Answer

Buyers of financial claims lend their excess funds because they want surplus funds in the future. Essentially, they want to save their money for later use and earn interest on it in the meantime. Option A is incorrect because the buyers are not necessarily expecting to borrow extra funds in the future. Option C is incorrect because it refers to investing rather than lending. Option D is incorrect because it suggests that buyers want to increase their costs, which is unlikely to be their motivation for lending money.

Question 19

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

Accepted Answer

When money is referred to as a "medium of exchange," it means that it is being used as something that is widely accepted as payment for goods and services. This definition is specific to the function of money as a means of facilitating transactions. While coinage and currency can be considered mediums of exchange, they are not the only ways in which money is used to facilitate transactions. Similarly, while money can be used as a standard of value, this is a different function than its use as a medium of exchange.

Question 20

Which of the following is NOT a term associated with shares?

Accepted Answer

Contractual claim is not typically associated with shares. However, Residual, Ownership, and Voting rights are key terms associated with shares.

Quiz 1: A Modern Financial System: An Overview