Corporate Finance
Test Bank
Course Introduction
Corporate Finance explores the principles and practices that guide financial decision-making within organizations. The course covers key topics such as capital budgeting, risk assessment, valuation of assets and firms, capital structure, dividend policy, and working capital management. Students learn how companies allocate resources, evaluate investment opportunities, raise and manage capital, and strive to maximize shareholder value while considering ethical and regulatory factors. Through case studies and practical applications, the course equips students with analytical tools to assess financial strategies, understand market dynamics, and make informed decisions in a corporate setting.
Recommended Textbook
Financial Institution Management 3rd Edition by Helen Lange
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1156 Verified Questions
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) In the traditional 'originate-to-hold' banking model, where a DI takes short-term deposits and uses them to make loans, the bank usually holds these loans until maturity. This exposes the bank to increased:
A) operating costs.
B) interest rate and liquidity risk.
C) increased monitoring costs
D) All of the listed options are correct.
Answer: D
Q2) Which of the following statements is true?
A) Loan contracts are bank debt contracts that generally have longer term to maturity than bond contracts.
B) The longer term nature of loans allows the financial intermediary to exercise more monitoring power and control over the borrower.
C) When bank loan contracts are sufficiently long term, the banker almost becomes like an insider to the firm.
D) None of the listed options are correct.
Answer: D
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Chapter 2: The Financial Services Industry: Depository
Institutions
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Sample Questions
Q1) Covered bonds:
A) were introduced following the GFC to ease liquidity pressures on the bank's balance sheet.
B) are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank.
C) are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank.
D) are issued by the Reserve Bank of Australia to FIs with liquidity problems.
Answer: B
Q2) In case of building societies, the members are usually linked to the society by some common bond such as locality or trade union.
A)True
B)False
Answer: False
Q3) The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.
A)True
B)False
Answer: False
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Chapter 3: The Financial Services Industry: Other Financial Institutions
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Sample Questions
Q1) Which of the following statements is true?
A) A closed-end investment company is a specialised firm that invests in securities and assets of other firms.
B) A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a fixed supply of shares outstanding itself.
C) A closed-end investment company is a specialised firm that invests in securities and assets of other firms but has a variable supply of shares outstanding itself.
D) A closed-end investment company has a variable supply of shares outstanding itself.
Answer: B
Q2) Superannuation funds manage funds saved throughout an employee's working life with the aim of providing the employee with a retirement income. A)True
B)False
Answer: True
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Chapter 4: Risk of Financial Institutions
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Sample Questions
Q1) An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.
A)True
B)False
Q2) Which function of an FI involves buying primary securities and issuing secondary securities?
A) brokerage
B) asset transformation
C) investment research
D) trading
Q3) The increased opportunity for a bank to securitise loans into liquid and tradable assets is likely to affect which type of risk?
A) sovereign risk
B) market risk
C) insolvency risk
D) technological risk
Q4) A short-funded FI is exposed to increasing interest rates.
A)True
B)False
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Sample Questions
Q1) The cumulative gap over the whole balance sheet by definition: A) must be greater than zero. B) must be lower than zero. C) must equal zero.
D) can take any value.
Q2) The repricing gap is a book-value based approach.
A)True
B)False
Q3) How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap?
A) The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities. B) The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C) The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities.
D) The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities.
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Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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Sample Questions
Q1) The statement that a portfolio is immunised using duration matching:
A) means that the FI is entirely hedged against interest rate risks.
B) is misleading as duration matching is a dynamic process and only hedges the FI against instantaneous interest rate changes.
C) is misleading as duration matching is a dynamic process and only hedges the FI against interest rate changes that occur within a month.
D) None of the listed options are correct.
Q2) The bank has a negative maturity gap. Is the bank exposed to interest rate increases or decreases and why?
A) Interest rate increases because the value of its assets will rise more than its liabilities.
B) Interest rate increases because the value of its assets will fall more than its liabilities.
C) Interest rate decreases because the value of its assets will rise less than its liabilities.
D) Interest rate decreases because the value of its assets will fall more than its liabilities.
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8
Chapter 7: Managing Interest Rate Risk Using Off Balance
Sheet Instruments
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Sample Questions
Q1) In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.
A)True
B)False
Q2) Which of the following statements is true?
A) Micro- and macro-hedging always lead to the same hedging strategies and results.
B) Micro- and macro-hedging can lead to the same hedging strategies but will lead to different results.
C) Micro- and macro-hedging will lead to different hedging strategies but will also lead to the same results.
D) Micro- and macro-hedging can lead to different hedging strategies and results.
Q3) Off-market swaps are swaps that are have non-standard terms that require one party to compensate another so the swap can be tailored to the needs of the transacting parties, compensation is usually in the form of an upfront fee or payment.
A)True
B)False
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Chapter 8: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) Which of the following is not a factor that may tend to increase loan sales in the future?
A) There is an increased trend to apply credit ratings to loans offered for sale, increasing the attractiveness to secondary market purchasers.
B) Because of their special credit monitoring skills, FIs have a comparative advantage in making loans to below-investment grade companies and then selling the loan.
C) The trend toward marked-to-market accounting for assets makes bank loans more like securities so they may be easier to sell.
D) The risk-based capital requirements of the Bank for International Settlements give banks a strong incentive to sell housing loans to decrease their amount of risky assets.
Q2) When a portion of a loan is sold from a large bank to a small bank, it is often called a participation.
A)True
B)False
Q3) What are four reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?
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Page 10
Chapter 9: Market Risk
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Sample Questions
Q1) Which of the following are problems associated with the BIS approach to calculating capital requirements for equities?
A) The approach assumes the same systematic risk factor for every stock.
B) The approach assumes the same unsystematic risk factor for every stock.
C) The approach does not fully consider the benefits from portfolio diversification.
D) The approach assumes the same systematic risk factor for every stock and the approach does not fully consider the benefits from portfolio diversification.
Q2) Which of the following statements is true?
A) Unsystematic risk is specific to a particular firm.
B) Unsystematic risk is specific to a particular industry.
C) Unsystematic risk is specific to a particular geographical area.
D) Unsystematic risk relates to the whole market.
Q3) Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.
A)True
B)False
Q4) Why is market risk measurement important?
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Chapter 10: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) The position of the business cycle in the economy is not important in assessing the default probability of a borrower.
A)True
B)False
Q2) Assume that B = $200 000, r = 1 year, i = 7 per cent, d = 0.9, N(h<sub>1</sub>) = 0.174120 and N(h<sub>2</sub>) = 0.793323. Using Moody's KMV Credit Monitor Model, what is the current market value of the loan (round to two decimals)?
A) $184 015.32
B) $186 478.64
C) $200 000.00
D) $214 000.00
Q3) Mortality rates analyse historic default risk experience of bonds and loans of similar quality.
A)True
B)False
Q4) In its simplest form the rate on a loan is set as the base lending rate plus a credit risk premium.
A)True
B)False
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Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) Assume that an FI's concentration limit on a particular sector is 15 per cent and that the sector's loss rate is 25 per cent. What is the maximum loss as a percentage of the FI's capital (round to two decimals)?
A) 1.67 per cent
B) 0.60 per cent
C) 10.00 per cent
D) 3.75 per cent
Q2) Which of the following statements is true?
A) The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default.
B) The product of the volatility of the default rate and the loss give default (LGD) is called the 'unexpected loss'.
C) The product of the volatility of the default rate and the loss give default (LGD) is a measure of the loan's risk.
D) All of the listed options are correct.
Q3) Minimum risk portfolios generally generate the highest returns.
A)True
B)False
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Chapter 12: Sovereign Risk
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Q1) Which of the following statements is true in relation to the Economist Intelligence Unit?
A) The Economist Intelligence Unit rates country risk by combined economic and political risk on a maximum of 100 points scale.
B) The Economist Intelligence Unit rates the risk based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR.
C) The Economist Intelligence Unit weighs subjective scores allocated by rating officers by the exposure of each bank to the country in question.
D) None of the listed options are correct.
Q2) Which of the following is a benefit to the lender in a loan rescheduling?
A) The FI may become locked into a particular loan portfolio structure.
B) Rescheduling may close the market for future loans.
C) Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire.
D) The FI may receive additional fees, collateral, and option features on the loan.
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) Which of the following statements is true?
A) FX trading is becoming increasingly popular globally.
B) FX trading has become redundant due to stable foreign exchange rates.
C) FX trading is a popular tool to generate profits, as there is little risk involved.
D) The number of FX traders has decreased over the years due to merger activities and as a consequence the number of FX transactions has decreased over time.
Q2) Which of the following statements is true for an FI that holds 200 000 in assets and 250 000 in liabilities?
A) The FI faces the risk that the euro will fall in value against domestic currency.
B) The FI faces the risk that the euro will rise in value against domestic currency.
C) The FI has net foreign assets of 200 000.
D) The FI has net foreign assets of 50 000.
Q3) Good managers can know in advance what exchange rates will be at the end of a particular time horizon.
A)True
B)False
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Chapter 14: Liquidity Risk
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Sample Questions
Q1) Which of the following statements is true?
A) The liquidity index compares the liquidity of a single institution with the industry average and thus measures the liquidity risk of that particular institution.
B) The liquidity index provides guidance for FIs on how much liquidity they should hold on a seasonal basis.
C) The liquidity index measures the potential losses an FI could suffer if new market entrants take away market share from the existing institutions.
D) The liquidity index measures the potential losses an FI could suffer from a sudden disposal of assets compared to the mount it would receive at a fair market value established under normal sales conditions.
Q2) Fire-sale price refers to the price received for:
A) an asset that has to be sold at half price.
B) a liability that has to be sold at half price.
C) an asset that has to be sold immediately.
D) a liability that has to be sold immediately.
Q3) The liquidity index will always lie between -1 and +1.
A)True
B)False
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Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) Which of the following is a mechanism used by FI managers to reduce demand deposit withdrawal rates?
A) implicit interest payments
B) minimum balance requirements
C) explicit interest payments
D) There is no way to mitigate withdrawal risk.
Q2) The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings.
A)True
B)False
Q3) The gross interest return is calculated as explicit interest less implicit interest.
A)True
B)False
Q4) A viable liability management strategy is the diversification of funding sources.
A)True
B)False
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Chapter 16: Off-Balance-Sheet Activities
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Sample Questions
Q1) Settlement in case of 'when issued' (WI) trading must be completed on:
A) the date on which the counterparties agree.
B) Tuesday.
C) Wednesday.
D) Thursday.
Q2) Which of the following statements is true?
A) Back-end fee is the fee imposed on the used component of a loan commitment.
B) Back-end fee is the fee imposed at the beginning of a loan contract.
C) Back-end fee is the fee imposed on the unused component of a loan commitment.
D) Back-end fee is the fee imposed at the end of a loan contract.
Q3) As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
A)True
B)False
Q4) The delta of an option refers to the change in the value of an:
A) option for a large unit change in the price of the underlying security.
B) option for a small unit change in the price of the underlying security.
C) underlying security for a small unit change in the price of the option.
D) underlying security for a large unit change in the price of the option.
Q5) Briefly explain how off-balance-sheet transactions can affect an FI's solvency.
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Chapter 17: Technology and Other Operational Risk
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Q1) Which of the following statements is true?
A) The profitability of any product innovation is negatively related to the size of the initial set-up and development costs and the FIs cost of capital.
B) The profitability of any product innovation is positively related to the size of the initial set-up and development costs and the FIs cost of capital.
C) The profitability of any product innovation is unrelated to the size of the initial set-up and development costs and the FIs cost of capital.
D) The relationship depends on the FI's individual situation.
Q2) Losses on technological innovations and new technology could weaken an FI because scarce capital resources were invested in value-decreasing projects.
A)True
B)False
Q3) According to KPMG there has been a decline in the number of credit cards on issue, while there was no slow-down in transaction activity.
A)True
B)False
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Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) In determining the risk-adjusted value of the on-balance-sheet credit equivalent amounts of the contingent guaranty contracts, the risk weights are determined by the credit rating of the underlying counterparty of the off-balance-sheet activity.
A)True
B)False
Q2) The market risk capital charge is included in capital regulations as regulators recognise that changes in market value can impact on a FI's insolvency risk.
A) Market risk takes into account general market risk, specific market risk and operational risk.
B) FIs with APRA approval can use a combination approach with all risk categories and across all regions.
C) APRA can increase or decrease capital requirements from the internal model if it considers that it doesn't reflect fully the FI's market risk profile.
D) All of the listed options are correct.
Q3) Why is a regulatory capital charge against operational risk necessary?
Q4) What are the major differences between the Basel I and the Basel II approaches to capital regulation?
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