Deck 2: Financial Markets

Question 1

In an underwritten offer,the firm issuing the commercial paper is guaranteed that:

A)the entire issue will be sold.
B)the entire issue will be taken up by the investment bank.
C)a discriminatory auction will be used to allocate the issue.
D)the investment bank will attract enough investors to sell the entire issue.

Answer 1

A

Question 2

Low credit rated commercial companies typically raise funds using which money market instrument?

A)Treasury notes.
B)Bank-accepted bills.
C)Commercial paper.
D)Negotiable CDs.

Answer 2

B

Question 3

________________ is (are)the largest class of participants in the Australian money markets.

A)Commercial banks.
B)Non-financial corporations.
C)The Commonwealth government.
D)The Reserve Bank of Australia.

Answer 3

A

Question 4

Which of the following statements is correct?

A)Money market transactions are seldom over $1 million.
B)Most money market transactions involve retail investors.
C)The money market is a dealer market linked by efficient communications systems.
D)Market transactions in money market securities include more primary market trades than secondary market trades.

Question 5

Investors purchase Treasury Notes:

A)in multiples of $10,000.
B)at par value.
C)on a discount basis.
D)both A and C.

Question 6

In a bank-accepted bill,the bank is:

A)the lender of funds.
B)the issuer of the bill.
C)the payer of the face value to the investor if the issuer defaults.
D)the borrower of funds.

Question 7

Money market securities are:

A)risk free assets.
B)long-term securities.
C)not traded before maturity date.
D)an alternative to bank borrowing for corporations' funding.

Question 8

Adjustable-rate preference shares are:

A)shares issued with adjustable rates.
B)shares that can be converted into ordinary shares at a predetermined ratio.
C)shares issued when partly paid for,so that there is an obligation on the holder to contribute the balance.
D)shares in which the preference dividend remains constant regardless of any increase in the firm's earnings.

Question 9

When firms issuing commercial paper (CP)use a backup line of credit offered by banks,it:

A)has no impact on CP investors.
B)decreases the marketability of CP.
C)increases the credit risk for CP investors.
D)decreases the credit risk for CP investors.

Question 10

In Australia,transfer of ownership of Treasury notes is performed by:

A)Austraclear.
B)RITS.
C)the Reserve Bank of Australia.
D)AOFM.

Question 11

Which of the following is not an instrument traded in the money market?

A)Debentures.
B)Promissory notes.
C)Commercial bills.
D)Certificates of deposit.

Question 12

The cash rate is an interest rate prevailing on the:

A)repo market.
B)Treasury notes market.
C)bank-accepted bills market.
D)unsecured interbank market.

Question 13

Which of the following statements is NOT correct? In the bidding process in a Treasury notes auction,

A)the minimum bid is $1,000,000.
B)the bidder specifies the quantity of notes desired.
C)the bidder specifies the yield he/she is willing to get.
D)only registered bidders can participate in the auction.

Question 14

Convertible notes are hybrid securities that:

A)can be converted into bonds at the discretion of the holder.
B)can be converted into debentures at the discretion of the holder.
C)can be converted into Treasury notes at the discretion of the holder.
D)can be converted into shares of common stock at the discretion of the holder.

Question 15

If a security receives a bank acceptance,the instrument is a(n):

A)equity paper.
B)one-name paper.
C)two-name paper.
D)commercial paper.

Question 16

In a Treasury note offering,

A)the bidders with the lowest yield in their bid are allocated the notes first.
B)AOFM is committed to buy the unsold Treasury notes.
C)the yield is fixed and announced before the tender.
D)bidders bid only quantities of securities.

Question 17

The price paid by investors to buy Treasury notes from a dealer is the:

A)bid price.
B)ask price.
C)face value.
D)market-clearing price.

Question 18

When a commercial bank issues a payment guarantee on behalf of an importer,that guarantee is a:

A)documented transfer.
B)letter of credit.
C)time draft.
D)sight draft.

Question 19

Which of the following securities is not a one-name paper?

A)Treasury notes.
B)Commercial paper.
C)Bank-accepted bills.
D)Certificates of deposit.

Question 20

A _____________ is a discount security.

A)share.
B)debenture.
C)commercial bill.
D)corporate bond.

Question 21

Unsecured notes usually pay ____________ coupons.

A)fixed.
B)floating.
C)no.
D)fixed and floating.

Question 22

Interest on corporate bonds is usually paid:

A)monthly.
B)six-monthly.
C)annually.
D)at maturity.

Question 23

Corporate bonds:

A)are discount securities.
B)do not need to be paid back.
C)pay interest at maturity date.
D)make periodic payments of interest and repay principal at the maturity date.

Question 24

Senior debt

A)is debt issued by the commonwealth government.
B)has a higher probability of payment than junior debt.
C)is debt that has priority in the event of default of the issuer.
D)is the debt issued by good credit rated companies.

Question 25

In the tenders organised by the AOFM to issue Treasury bonds:

A)bidders win if the quantity in their bid is among the highest.
B)bidders win if the yield in their bid is among the highest.
C)AOFM serves the bidders with the lowest yields first and then accepts highest yields up to the exhaustion of the quantity on issue.
D)bidders bid quantities at the yield announced by AOFM.

Question 26

Hybrid securities are financial products that have characteristics of:

A)debt and equity.
B)government bonds.
C)discount securities.
D)credit-wrapped bonds.

Question 27

Which of the following can best be described as a hybrid equity instrument with some characteristics of both equity and debt?

A)debentures.
B)partly paid shares.
C)preference shares.
D)promissory notes.

Question 28

_____________ is (are)the biggest net supplier of funds in the capital markets.

A)financial institutions.
B)state and local governments.
C)federal government.
D)individuals and households.

Question 29

A capital market financing is most likely used to finance:

A)suppliers' bills.
B)the employees' wages.
C)new plant and equipment.
D)seasonal inventory needs.

Question 30

The RBA is a large investor in Treasury bonds and notes due to its role:

A)as the bank of the government.
B)in the stability of the government.
C)in the conduct of monetary policy.
D)as a supervisor of the financial system.

Question 31

Dealer panels are:

A)similar to brokers in the stock market.
B)a small set of bond dealers acting on behalf of the governments.
C)a small set of bond dealers acting on behalf of the households and non-profit organisations.
D)a small set of bond dealers that agree to buy semis from state governments in either closed auctions or through agreeing to buy a given amount at a given price.

Question 32

Everything else being equal,a corporate bond will sell at a higher yield if it:

A)is senior debt.
B)has a call provision.
C)has lower default risk.
D)can be converted to shares.

Question 33

Which of the following are features of some preference shares?

A)participating.
B)cumulativeness.
C)non-participating.
D)all of the above.

Question 34

A _____________is not an example of a capital market security.

A)Commonwealth government bond.
B)Share.
C)Commercial paper.
C)Corporate bond.

Question 35

The term shareholder equity implies:

A)a right to dividends.
B)an ownership claim.
C)a prior claim on income and assets.
D)a contractual relationship with a corporation.

Question 36

State government bonds ________ than Commonwealth government bonds.

A)pay higher yields.
B)have higher liquidity.
C)have lower default risk.
D)have higher marketability.

Question 37

An unsecured note is a bond:

A)for which there is no underlying specified security as collateral in the case of default.
B)for which there is some underlying specified security as collateral in the case of default.
C)which has a call provision.
D)with sinking fund.

Question 38

Life insurance companies and superannuation funds buy corporate bonds for which two major reasons?

A)low risk and liquidity.
B)tax sheltering and high yield.
C)liquidity and high after-tax returns.
D)liability maturity matching and high after-tax returns.

Question 39

Australian Treasury bonds pay coupons:

A)monthly.
B)annually.
C)at maturity.
D)semi-annually.

Question 40

Fixed-charge debenture holders have the right to the proceeds of the sale of the assets:

A)specified in the debenture,should the bond default.
B)specified in the debenture that is not already pledged against a fixed charge in any other debenture.
C)specified in a trust.
D)at all times.

Question 41

An initial public offering of shares is:

A)an issue of new shares to existing shareholders.
B)an offering of new shares privately to a specific institutional investor.
C)an issue of shares that have never before been offered to the public.
D)a rights issue.

Question 42

Share amalgamations:

A)try to prevent excessive speculation from destabilising the market.
B)encompass the division of the entity's shares into units of smaller value.
C)is a system in which larger institutions submit bids for blocks of stock in an IPO.
D)are the revaluation and elimination of some of the firm's issued shares,resulting in a smaller number of shares of a higher value,with the overall market capitalisation of the company remaining unchanged.

Question 43

Which of the following statements is not correct? An ordinary shareholder in a troubled corporation:

A)may lose his/her house.
B)does not receive dividends.
C)records a decrease in the value of his/her assets.
D)receives the proceeds from the sale of the assets after the creditors and the preference shareholders are paid,if the company goes bankrupt.

Question 44

Generally,Commonwealth government bonds are assigned a ___________ rating.

A)AAA.
B)AA.
C)A.
D)BBB.

Question 45

The sale of securities to the public via an investment banker by a privately owned corporation raising funds is called:

A)a seasoned offering.
B)a secondary offering.
C)a best efforts offering.
D)an initial public offering.

Question 46

The secondary markets for capital market securities have facilitated economic growth in general because:

A)they make people more willing to invest because they can more easily diversify their risk.
B)they help provide marketability for capital market claims.
C)they have increased people's willingness to buy capital market claims.
D)all of the above.

Question 47

Which of the following statements is true?

A)subordinated debt ranks above ordinary shareholders in the event of liquidation.
B)unsubordinated debt takes a lower ranking than other debt of similar characteristics.
C)subordinated debt ranks above other similar classes of debt in the event that a firm is liquidated.
D)all of the above.

Question 48

The listing requirements of the ASX apply to:

A)companies whose shares trade on the ASX.
B)merchant bankers.
C)stockbrokers.
D)all of the above.

Question 49

Non-renounceable rights:

A)trade in a secondary market until the exercise date.
B)cannot be sold on the market and shareholders have the option to subscribe to the rights issue or let the offer lapse.
C)may be sold on the market if shareholders do not want to subscribe to a rights issue and increase their shareholdings.
D)are rights given to an investor who acquired them from the issuer or from another investor to purchase additional shares at a slightly below-market price.

Question 50

Which of the following statements is not correct? A stock market crash can lead to an economic recession through:

A)the decrease in wealth resulting in a decrease in consumption.
B)the rise in the cost of raising capital resulting in a decrease in investment.
C)the decrease in share issuers' equity resulting in a decrease in investment.
D)the decrease in consumer confidence resulting in a decrease in consumption.

Question 51

Assuming the only difference between bonds is their level of risk,we would expect bonds with a _______ rating to trade at the highest yields.

A)AAA.
B)AA.
C)A.
D)BBB.

Question 52

Nonparticipating preference shares imply that:

A)the issuer has the right to buy back shares from the holders.
B)the dividend adjusts in response to a change in market interest rates.
C)the preference dividend remains constant regardless of any increase in the firm's earnings.
D)the firm cannot pay a dividend on its ordinary shares until it has paid the preference shareholders the dividends in arrears.

Question 53

The extent to which orders exist both above and below the price at which the share currently trades reflects the share market's:

A)depth.
B)breadth.
C)resilience.
D)short position.

Question 54

Which of the following is not a feature of a debenture?

A)unsecured.
B)fixed term.
C)regular coupons.
D)redemption at face value.

Question 55

A dividend reinvestment scheme is:

A)an offering of new issues of shares or bonds.
B)the date on which a company ceases to effect transfers of its shares.
C)the amount that must be paid per share to buy a new issue.
D)a scheme in which shareholders are allowed to reinvest dividends into shares.

Question 56

Which of the following characteristics is not associated with ordinary shares?

A)vote by proxy.
B)limited liability.
C)cumulative dividends.
D)residual claim on income and assets.

Question 57

Which of the following is not an equity instrument?

A)a debenture.
B)a preference share.
C)a fully paid ordinary share.
D)a partly paid ordinary share.

Question 58

A limit sell order at $20 for a particular share means that the investor:

A)only accepts to sell for a price of $20.
B)will not trade for prices higher than $20.
C)accepts to sell for prices equal or lower than $20.
D)accepts to sell for prices equal or higher than $20.

Question 59

In its capacity as the regulator of the financial markets,ASIC:

A)supervises the entities listed on the ASX.
B)conducts surveillance to detect insider trading on ASX.
C)conducts surveillance to detect market manipulations on ASX.
D)investigates and prosecutes in case of illegal activities in the share market.

Question 60

When an investor buys convertible preference shares,the investor:

A)can replace fixed dividends by coupons.
B)is personally liable for the firm's obligations.
C)has a set dividend rate usually for a five-year period.
D)can convert into preference shares at a predetermined ratio.

Question 61

Which of the following is not a derivative?

A)an ordinary share in a company.
B)a futures contract.
C)an options contract.
D)a swap contract.

Question 62

Futures contracts differ from forward contracts in all of the following ways except:

A)delivery is made most often in forward contracts.
B)futures markets are more formal than forward markets.
C)forward contracts involve an intermediary or exchange.
D)futures contracts are standardised; forward contracts are not.

Question 63

Futures contracts differ from forward contracts in that:

A)forward contracts always require a margin deposit.
B)futures contracts are between the individual hedger and speculator.
C)futures contracts are personalised,unique contracts; forwards are standardised.
D)futures contracts are marked to market daily with changes in value added or subtracted from buyer and seller.

Question 64

A put option written on a futures contract gives the buyer the right to:

A)sell the asset underlying the futures contract.
B)buy the asset underlying the futures contract.
C)sell the futures contract underlying the option contract.
D)buy the futures contract underlying the option contract.

Question 65

Novation in futures exchange means:

A)a place in which buyers and sellers can exchange futures contracts.the exchange keeps the books for buyers and sellers when contracts are initiated or liquidated.
B)the process of setting up a contract with a new party,such as occurs when clearinghouses insert themselves between the buyer and seller of a futures contract.
C)a requirement that gains or losses on futures positions be taken into account in determining the value of all contracts each day.
D)the back office that records,clears and settles contracts and acts as counterparty in futures trading.

Question 66

A crawling peg is:

A)an exchange rate that is allowed to float or move within a defined or set band relative to another currency.
B)a managed float where an exchange rate is allowed to appreciate in controlled steps over time.
C)an exchange rate determined by the supply and demand factors in the FX markets.
D)a constant rate of exchange between currencies.

Question 67

_________________ is the first payment required for a futures contract.

A)a bond.
B)a deposit.
C)a premium.
D)an initial margin.

Question 68

An investor planning to buy NAB Bank shares in 30 days can protect himself against price risk by:

A)selling a NAB bank put option that matures in 30 days.
B)buying a NAB bank call option that matures in 30 days.
C)selling a NAB bank call option that matures in 30 days.
D)none of the above options are correct.

Question 69

The part of a futures market that facilitates settlement of contracts and transfer of ownership between the parties to transactions is correctly referred to as a:

A)clearing house.
B)counting house.
C)central registry.
D)settlement facility.

Question 70

If a futures trader fails to pay a margin call on a futures contract,the contract is:

A)closed out by the counterparty.
B)allowed to lapse.
C)cancelled by the futures exchange.
D)closed out by the clearing house.

Question 71

Which of the following statements regarding forward rate agreements (FRAs)is false:

A)FRAs are settled by the payment of the difference in interest payable on a notional principal at the agreed rate and at the current market rate.
B)if the market has risen,the buyer must pay the seller of the FRA.
C)FRAs are signed on the trade date.
D)none of the above.

Question 72

______________ are always obligations for the buyer.

A)Call options.
B)Put options.
C)Futures contracts.
D)All of the above.

Question 73

The purchase of one million dollars of Treasury Bonds,delivered in 60 days,from a government securities dealer is:

A)a put.
B)a call.
C)a swap.
D)a forward contract.

Question 74

Settlement date in a forward contract means:

A)forward prices are always higher than spot prices.
B)spot prices are always higher than forward prices.
C)the future date on which the buyer pays the seller and the seller delivers the assets to the buyer.
D)the contracted party that exchanges one item for another for a predetermined price at a predetermined point in time.

Question 75

A hedger in the financial futures market:

A)only sells futures contracts.
B)only buys futures contracts.
C)aims to reduce their price risk.
D)either buys or sells future contracts in the expectation of earning a high return.

Question 76

If a country experiences inflation,generally:

A)its interest rates will fall.
B)its exports will increase significantly.
C)the forward exchange rate will fall relative to all other countries.
D)its forward exchange rate will fall relative to countries with lower inflation.

Question 77

Which of the following are always obligations for the seller:

A)Put options.
B)Futures contracts.
C)Call options.
D)All of the above.

Question 78

Put options:

A)give the option buyer the right to buy a security at the strike price.
B)give the option buyer the right to sell a security at the strike price.
C)give the option buyer the right to buy or sell a security at the strike price.
D)give the option buyer the right to sell a security at the mark to market price.

Question 79

The forward price for an asset is the price that makes the forward contract:

A)have zero net present value.
B)have negative net present value.
C)have positive net present value.
D)have zero or positive net present value.

Question 80

Which of the following statements best describes marking to market?

A)The process of personalising futures contracts.
B)The final day on which trading occurs in a particular contract.
C)The requirement of a futures exchange for daily cash settlement of all contracts.
D)The process of setting up a contract with a clearinghouse to operate as counterparty between the buyer and seller of a futures contract.