Chapter 1
A. barters.
B. money.
C. governments.
D. some combination of government transfer and barter.
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.
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.
A. consumers to investors.
B. savers to borrowers.
C. businesses to consumers.
D. borrowers to investors.
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
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Chapter 1
9. The process of facilitating the flow of funds between borrowers and lenders performed by the
financial system:
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
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.
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.
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:
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.
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.
A. Residual
B. Ownership
C. Voting rights
D. Contractual claim
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Chapter 1
19. Which of the following is NOT a characteristic commonly associated with preference
shares?
A. bills.
B. debentures.
C. shares.
D. equities.
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.
22. Debt instruments that can be easily sold and transferred in the financial markets are called:
A. negotiable.
B. secured.
C. unsecured.
D. discounted.
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
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.
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Chapter 1
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.
35. When a security is sold in the financial markets for the first time:
A. economic market.
B. primary market.
C. secondary market.
D. financial market.
40. When a large company issues a financial instrument into the financial markets:
42. The flow of funds through financial markets increases the volume of savings and investment
by:
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.
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Chapter 1
A. issue of debentures.
B. issue of unsecured notes.
C. term loan.
D. issue of shares.
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.
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
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Chapter 1
56. Small savers prefer to use financial intermediaries rather than lending directly to borrowers
because:
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.
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.
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.
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.
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.
A. a stockbroker.
B. the Australian Securities Exchange.
C. the Australian Securities Commission.
D. an insurance company.
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
65. Which of the following borrowers would pay the lowest interest rate on debts of equal
maturity?
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
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.
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.
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Chapter 1
72. A company that issues promissory notes into the short-term debt markets is conducting a
transaction in the:
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
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.
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.
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.
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
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Chapter 1
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
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.
80. The major financial assets traded in the capital market are:
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.
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Chapter 1
84. All of the following are key financial services provided by the financial system except:
A. liquidity.
B. risk transfer.
C. profitability.
D. information.
85. Which of the following would be most likely to use financial markets to borrow?
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
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.
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.
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Chapter 1
90. XYZ Enterprises Limited needs to raise additional funding to expand its manufacturing
operations. Management decides to issue $10 million in corporate bonds over the next three
months. These securities will be issued in the:
A. wholesale market.
B. secondary market.
C. money market.
D. capital market
The End