Question 1

There are many types of bank accounts which offer depositors a range of risk and return options.

Accepted Answer

False

Question 2

The effective interest rate on a bank account will be lower than the quoted per annum nominal rate.

Accepted Answer

The effective interest rate typically accounts for the compounding effect throughout the year, which usually results in a higher effective rate compared to the nominal rate that does not consider compounding.

Question 3

The main advantage of 'at call' accounts is they enable depositors easy access to their funds.

Accepted Answer

The statement is true. 'At call' accounts allow depositors to withdraw their funds on demand which makes it easy for them to access their money whenever they need it.

Question 4

Bank accounts are capital stable investments.

Accepted Answer

Bank accounts are generally considered to be capital stable investments as they offer low risk and a fixed rate of return.

Question 5

'The majors' are the four largest Australian-owned banks.

Accepted Answer

The majors refer to Commonwealth Bank, Westpac, ANZ and NAB, which are the four largest Australian-owned banks.

Question 6

Term deposits are illiquid because the funds cannot be withdrawn prior to the end of the term.

Accepted Answer

The answer of Term deposits are illiquid because the funds...

Question 7

An NCD is a wholesale-sized deposit that has a fixed term and an agreed interest rate that can be traded in the money market.

Accepted Answer

The statement is true. NCD stands for Negotiable Certificate of Deposit, and it is a type of security issued by banks or financial institutions in large denominations that can be traded in the secondary market.

Question 8

A $1000 deposit at 5% p.a.with daily compounding will earn interest of $1161.82 in three years.

Accepted Answer

With daily compounding, the future value of a $1000 deposit at 5% per annum over three years is calculated using the formula $A = P(1 + \frac{r}{n})^{nt}$, where $P = 1000$, $r = 0.05$, $n = 365$, and $t = 3$. This does not yield $1161.82; the correct calculation gives a different amount.

Question 9

The main advantage of savings accounts is they enable depositors to store funds and earn interest.

Accepted Answer

Savings accounts are specifically designed for depositors to earn interest on their funds while still having access to them.

Question 10

'The majors' are retail banks only and do not provide investment banking services.

Accepted Answer

The majors, such as JPMorgan Chase and Bank of America, provide both retail banking and investment banking services.

Question 11

Intermediation implies that banks only earn net interest income.

Accepted Answer

Intermediation involves various activities such as providing loans, accepting deposits, offering investment services, charging fees, etc. Therefore, banks can earn other types of income besides net interest income, such as non-interest income.

Question 12

The main way that banks borrow from the domestic financial markets is through the issue of bonds.

Accepted Answer

The answer of The main way that banks borrow from...

Question 13

Banks have increased their reliance on funding from the financial markets since the GFC.

Accepted Answer

The answer of Banks have increased their reliance on funding...

Question 14

Since the GFC banks have viewed deposits as a more reliable source of funds than the financial markets.

Accepted Answer

During and after the Global Financial Crisis (GFC), banks have viewed deposits as a more reliable source of funds than the volatile financial markets. This is because deposits are considered to be more stable and predictable compared to other sources of funding such as interbank lending or bond issuances. Additionally, banks have had to increase their liquidity buffers and limit their reliance on short-term funding, which has further reinforced the importance of deposits.

Question 15

ADIs manage the mismatch between the preferences of depositors and borrowers.

Accepted Answer

ADIs (Authorized Deposit-taking Institutions) facilitate the intermediation between depositors and borrowers. They collect funds from depositors and lend them to borrowers. However, depositors and borrowers may have different needs and preferences regarding the maturity, liquidity, and risk of the funds. ADIs manage this mismatch by offering a range of deposit and loan products with different features and by monitoring and balancing their asset and liability mix.

Question 16

ADIs accept deposits and make loans.

Accepted Answer

ADIs (Authorized Deposit-taking Institutions) are financial institutions authorized by the regulatory authority to accept deposits and make loans to customers. Examples of ADIs include banks, credit unions, and building societies.

Question 17

Credit unions and building societies operate as though they were small retail banks.

Accepted Answer

Credit unions and building societies offer many of the same services as retail banks, such as savings accounts, loans, and mortgages. However, they are often smaller and more community-focused, with a different organizational structure and governance model.

Question 18

Banking regulations prohibit foreign subsidiary banks from participating in the retail segment of the Australian banking industry.

Accepted Answer

Foreign subsidiary banks are permitted to participate in the retail segment of the Australian banking industry, but they must comply with Australian banking regulations and obtain necessary licenses from regulatory authorities.

Question 19

Macquarie Bank is Australia's fifth-largest retail bank.

Accepted Answer

Macquarie Bank is primarily known as an investment bank and does not rank as Australia's fifth-largest retail bank. The major retail banks in Australia are commonly referred to as the "Big Four," which are ANZ, Commonwealth Bank, NAB, and Westpac.

Question 20

If $1000 grows to $1161.82 over a period of three years, the effective interest rate is 5% p.a.

Accepted Answer

The effective annual interest rate can be calculated using the formula for compound interest: $A = P(1 + r)^n$, where $A$ is the amount of money accumulated after n years, including interest, $P$ is the principal amount (the initial amount of money), $r$ is the annual interest rate (decimal), and $n$ is the time the money is invested or borrowed for, in years. Rearranging the formula to solve for $r$, we get $r = \left(\frac{A}{P}\right)^{\frac{1}{n}} - 1$. Substituting the given values ($A = 1161.82$, $P = 1000$, $n = 3$) into the formula gives $r = \left(\frac{1161.82}{1000}\right)^{\frac{1}{3}} - 1 \approx 0.05$ or 5% per annum. However, this calculation assumes the interest rate is compounded annually, which might not be the case given the specific growth of the investment. The statement assumes a specific compounding period without specifying it, which could lead to misunderstandings about how the effective interest rate is calculated. The effective annual rate (EAR) could differ based on compounding frequency, thus without specifying the compounding frequency, stating the effective interest rate is exactly 5% p.a. might be misleading.

Quiz 5: Authorised Deposit-Taking Institutions