Deck 8: The Capital Market

Question 1

A savings-surplus unit is one:

A)whose revenue-earning capacity exceeds its expenditure.
B)whose expenditure exceeds its revenue-earning capacity.
C)that needs to borrow funds from a direct source.
D)that is normally a finance company.

Answer 1

whose revenue-earning capacity exceeds its expenditure.

Question 2

Merchant or investment banks are classified under the Financial Corporations Act as:

A)money market corporations.
B)financial agencies.
C)investing institutions.
D)financial institutions.

Answer 2

money market corporations.

Question 3

The financing process involves a flow of funds from the:

A)savings deficit to savings surplus units.
B)savings surplus to savings deficit units.
C)primary market to secondary market.
D)central bank to the savings deficit unit.

Answer 3

savings surplus to savings deficit units.

Question 4

Unit trusts and investment companies are a common form of investment in which the funds of investors are pooled and invested by a professional management company in:

A)riskless assets.
B)risky assets.
C)cash and domestic stocks.
D)a wide range of investments.

Question 5

A savings-deficit unit is one:

A)whose expenditure is equal to the income generated.
B)whose expenditure exceeds its income for a particular period.
C)that needs to borrow from a financial intermediary.
D)whose expenditure is equal or greater than its income generated.

Question 6

The major difference between investing institutions and financial intermediaries is that:

A)investing institutions accept money from the public and invest the funds in assets,while financial intermediaries merely act as a third party and oversee the transfer of funds.
B)financial intermediaries generally have a much wider spread of assets than investing institutions.
C)the major role of financial intermediaries is to accept deposits and make loans while investing institutions are directed towards providing insurance and funds management.
D)investing institutions are not required to pay tax under the current Australian tax system.

Question 7

Which of the following best describes the functions of the capital market?

A)Accepts funds from the public and invests them in assets.
B)A market where securities may be traded without incurring capital gains tax.
C)Enables the suppliers of funds and the users of funds to negotiate the conditions on which the funds will be transferred.
D)A market in which trading takes place by competitive bidding on an organised exchange.

Question 8

Which function provides a service to companies that wish to deposit idle cash balances or borrow funds for a short to medium period?

A)Investment management function.
B)Corporate finance function.
C)Money market operation.
D)Foreign exchange and derivative function.

Question 9

The Australian dollar was floated in:

A)June 1983.
B)June 1984.
C)December 1982.
D)December 1983.

Question 10

Which Act gives extensive powers to APRA over almost all aspects of banking operations?

A)APRA Act 1998.
B)Reserve Bank Act 1959.
C)Banking Act 1959.
D)Shareholdings Act 1972.

Question 11

Which committee concluded that deregulation would improve the efficiency of the Australian financial system?

A)Banking committee.
B)Reserve Bank of Australia committee.
C)Campbell committee.
D)Basel committee.

Question 12

The Basel committee was established by the:

A)European Central Bank.
B)BIS.
C)IMF.
D)World Bank.

Question 13

Which of the following statements is the most accurate?

A)Stock markets facilitate the flow of funds from savings-deficit units to savings-surplus units.
B)Stock markets facilitate the trading of shares of all companies.
C)A portfolio consisting of all shares traded on the Australian Stock Exchange would represent the market portfolio.
D)Stock markets provide liquidity for share trading.

Question 14

The market for new issues of securities where the sale proceeds go to the issuer of the securities is known as:

A)secondary market.
B)seasoned market.
C)liquid market.
D)primary market.

Question 15

Which agency's approval is required before a bank is permitted to operate in Australia?

A)APRA.
B)RBA.
C)ASIC.
D)Both APRA and RBA.

Question 16

Securitisation is the process of:

A)making assets marketable by aggregating income-producing assets in a pool and issuing new securities backed by the pool.
B)hiring underwriters to ensure share issues are fully subscribed.
C)converting tradeable securities into illiquid assets such as bank loans.
D)only lending and/or investing with companies that have an AAA credit rating.

Question 17

Buying shares on the stock market is an example of:

A)a primary market transaction.
B)a secondary market transaction.
C)companies raising new funds.
D)companies raising funds from a secondary source.

Question 18

The role of a bank is to:

A)facilitate the flow of funds from savings-deficit units to savings-surplus units.
B)attract funds from the household sector to facilitate borrowing by the business sector.
C)control the level of interest rates.
D)facilitate the flow of funds from savings-surplus units to savings-deficit units.

Question 19

A market where previously issued securities are traded is known as:

A)secondary market.
B)seasoned market.
C)liquid market.
D)primary market.

Question 20

An example of a direct form of funding is:

A)raising finance through financial intermediaries.
B)a bonus share issue.
C)an issue of debentures.
D)the purchase of debentures.

Question 21

With regard to the process of deregulation,the major changes that resulted in the decrease in the number of merchant banks occurred in which year?

A)1980
B)1984
C)1982
D)1988

Question 22

What is the primary difference between property trusts that take the form of a trust and those that use a company structure?

A)There are fewer fees associated with the company structure.
B)International investors are able to acquire an interest in a property trust that uses the trust structure;however,they are not permitted to acquire those with a company structure.
C)ASIC regulates company-structured trusts more vigorously.
D)Trusts are obliged to distribute all of their income to investors whereas the dividends paid out by a company are at the discretion of its management.

Question 23

Which of the following is an example of an investing institution?

A)banks
B)finance companies
C)superannuation funds
D)money market corporations

Question 24

Secondary markets:

A)do not raise new funds,but provide liquidity.
B)facilitate capital-raising in the primary market.
C)allow borrowers to raise long-term funds.
D)all of the given options.

Question 25

Open-market operations refer to:

A)the method by which the Reserve Bank of Australia implements monetary policy.
B)the method by which the Reserve Bank of Australia allows banks to raise finance.
C)the method by which the Reserve Bank of Australia regulates the finance sector.
D)the market for short-term securities.

Question 26

A broker may:

A)underwrite an issue of new securities.
B)sell an issue of securities.
C)advise companies that are considering a merger or acquisition,regardless of its size.
D)either underwrite or sell an issue of securities or both.

Question 27

The parties to a mortgage contract include the:

A)mortgagor (lender)and the mortgagee (borrower).
B)bank official and a home buyer.
C)lessee and the lessor.
D)mortgagor (borrower)and the mortgagee (lender).

Question 28

Which of the following is not a function of financial intermediaries?

A)Accept funds from the public and invest them in assets.
B)Harmonise the differences in size,maturity and risk preferences between surplus units and deficit units.
C)Generate economies of scale as a result of the specialist skills that financial intermediaries acquire in credit assessment and monitoring of the performance of borrowers.
D)Result in the pooling of the risks associated with a portfolio of loans.

Question 29

The term 'to underwrite' refers to:

A)a type of insurance that is offered by brokers to investors for protection against capital loss.
B)a legal contract binding both the seller and buyer of shares against potential loss.
C)an agreement by a broker to buy a portion of shares that are to be issued.
D)insurance offered by banks against changes to mortgage interest rates.

Question 30

Which of the following accounts for approximately 90% of all commercial lending by intermediaries?

A)Banks
B)Finance Companies
C)Money Market Corporations
D)Merchant Banks

Question 31

A company may use merchant banks to:

A)act either as a financial agency institution or a financial intermediary,or both.
B)act as a financial agency institution,but not as a financial intermediary.
C)act as a financial intermediary,but not as a financial agency institution.
D)facilitate the direct transfer of funds from borrowers to lenders.

Question 32

Superannuation funds and life insurance companies invest the majority of their assets in:

A)cash and deposits.
B)land and buildings.
C)equities and unit trusts.
D)loans and placements.

Question 33

Equity markets involve:

A)a permanent transfer of funds.
B)a temporary transfer of funds.
C)a predetermined return to investors.
D)a temporary transfer of funds with a predetermined return to investors.

Question 34

Merchant banks:

A)provide a service to companies that wish to deposit temporarily idle cash balances or to borrow funds for a long-term period.
B)are involved in quoting only a sell price and are price takers when involved in buying.
C)provide underwriting and marketing services for new issues.
D)all of the given options.

Question 35

Deregulation of the finance sector in the 1980s sought to:

A)reduce the profiteering of banks.
B)reduce the takeover activity of major Australian companies.
C)reduce the transaction costs and direct funds to their most productive use.
D)increase the control of the Reserve Bank over financial intermediaries.

Question 36

Which of the following is the automated exchange system used in Australia since 1990?

A)Australian Stock Exchange.
B)Stock Exchange Automated Trading System.
C)Electronic Stock Brokering System.
D)Automated Teller Machine.

Question 37

Why do banks often act as intermediaries to obtain funds for companies from overseas?

A)It is illegal for companies to obtain funds from abroad unless they are listed as a financial intermediary with APRA.
B)They typically have high credit ratings and hence are better placed to borrow money overseas than many companies.
C)Borrowing funds from overseas sources is risky,and where a bank acts as an intermediary they bear all the default and foreign exchange risk.
D)All of the given options.

Question 38

Which of the following is not a financial transaction that banks are involved in:

A)provision of guarantee.
B)devising credit ratings.
C)bill endorsements.
D)providing guarantees.

Question 39

With regard to the process of deregulation,the reduction of barriers to entry to the banking industry by allowing access to banking licences for building societies and foreign banks commenced in:

A)February 1984.
B)February 1985.
C)February 1986.
D)April 1986.

Question 40

Which of the following is not one of the four main functions of investment banks?

A)the wholesale banking operation
B)the investment management function
C)making a market in foreign exchange and derivative securities
D)regulating the stock exchange

Question 41

The proportion of bank assets invested in money markets has decreased over the past 10 years.

Question 42

______________________ borrow funds on their own behalf and then lend the funds to another party.

Question 43

Securitisation is the process of converting _________ assets such as bank loans into tradeable securities.

Question 44

The ASX is the only stock exchange now operating in Australia.

Question 45

An example of an 'off balance sheet' area that banks are usually involved in is:

A)providing letters of credit.
B)a market-related activity such as foreign currency hedges.
C)providing bill endorsements.
D)all of the given options.

Question 46

During the global financial crisis investment banks faced greater pressure as:

A)a consequence of higher leverage and exposure to impaired assets.
B)increasing equity prices of financial institutions.
C)the ability to provide illiquidity.
D)All of the given answers.

Question 47

The capital adequacy requirements imposed on banks in 1988:

A)provided cost incentives for the banks to transfer much of the lending activities of their parent bank to their merchant bank subsidiaries.
B)provided cost incentives for the banks to transfer much of the lending activities of their finance company subsidiaries to the parent bank.
C)strengthened the competitive advantage enjoyed by finance companies.
D)all of the given options.

Question 48

A primary market is where securities that were previously issued are traded.

Question 49

Many stockbroking firms have extended their services beyond those traditionally offered and now also provide a range of services in money markets.

Question 50

_____________ securities are two or more legally separate instruments,typically an ordinary share plus units in one or more related trusts,which cannot be traded separately.

Question 51

Superannuation funds are characterised as ___________ institutions.

Question 52

The primary regulator of Australia's banks,insurance companies,superannuation firms and building societies is ASIC.

Question 53

Which of the following transactions are taking place in a primary market?

A)A superannuation fund buys 10 000 shares in the ASX.
B)A company issues $20 million of ordinary shares.
C)An investment bank provides advice to a company about raising capital.
D)All of the given answers.

Question 54

Which of the following statements is true?

A)In the 1990s,greater growth has been experienced in the assets of superannuation funds within life offices than outside.
B)The growth in do-it-yourself superannuation funds is a significant reason why,in the 1990s,the assets of superannuation funds within life offices have experienced greater growth than those outside life offices.
C)The Commonwealth Government's superannuation guarantee charge policy has led to a rapid growth in Australia's superannuation industry during the 1990s.
D)None of the given options.

Question 55

A financial agency institution arranges or facilitates the direct transfer of funds from lenders to borrowers.

Question 56

Which of the following transactions are taking place in a secondary market?

A)An superannuation fund buys 10 000 shares in the ASX.
B)A company issues $20 million of ordinary shares.
C)An investment bank provides advice to a company about raising capital.
D)All of the given answers.

Question 57

Companies are better placed than banks to borrow overseas because they have a lower credit rating.

Question 58

Which of the following statements is false?

A)Funds in non-callable deposits,that all banks were required to lodge with APRA,earned interest at the same rate as Treasury notes.
B)In August 1999,APRA introduced the prime assets requirement to ensure that banks held a minimum level of highly liquid assets.
C)The required non-callable deposit was 1% of a bank's total liabilities less shareholders' funds.
D)Prime assets,by definition,include notes and coins.

Question 59

In an ___________________ market there is no organised exchange and the market consists of financial institutions that trade with clients and each other.

Question 60

The process of securitisation such as issuing residential mortgage-backed securities (RMBS)allows financial institutions to:

A)fund lending directly.
B)creates deposits.
C)fund lending indirectly through the capital market.
D)None of the given answers.

Question 61

The Australian Government has always provided an explicit guarantee of bank deposits.

Question 62

Explain the process of securitisation and provide examples of asset backed securities in Australia.

Question 63

Classify the following financial institutions according to whether they are financial agency institutions,financial intermediaries or investing institutions.

A)Banks
B)Superannuation funds
C)Stockbrokers
D)Insurance companies

Question 64

Explain the role of investment banks in Australia and outline some potentials conflicts of interest that may arise from these different activities.