Financial Instruments
Mock Exam
Course Introduction
This course provides a comprehensive overview of financial instruments, including their classification, valuation, and applications in both corporate finance and investment management. Topics covered include equity securities, debt instruments, derivatives (such as options, futures, and swaps), and hybrid securities. Students will explore the regulatory environment, risk and return characteristics, and the role of financial instruments in portfolio construction and risk management. The course incorporates both theoretical foundations and practical applications, equipping students with the analytical skills necessary to evaluate various financial products in real-world scenarios.
Recommended Textbook
Financial Institutions Instruments and Markets 7th Edition by Christopher Viney
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Page 2
Chapter 1: A Modern Financial System: An Overview
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Sample Questions
Q1) 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
Answer: B
Q2) Individuals may be categorised as risk averse,risk neutral or risk takers.Risk averse individuals will accept a lower rate of return so as to reduce their risk exposure.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Commercial Banks
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Sample Questions
Q1) With regard to bank bills,the bill is sold at a discount:
A) because the bank needs to find a buyer.
B) to encourage buyers.
C) because the difference between the initial price and the final sale price is the return to the holder.
D) because the bank pays the face value of the funds to the borrower at maturity.
Answer: C
Q2) One of the important attributes of certificates of deposit for a bank is the ability to adjust the yields on new issues.
A)True
B)False
Answer: True
Q3) The greater the dominance of commercial banks in an economy,the less regulation required.
A)True
B)False
Answer: False
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Chapter 3: Non-Bank Financial Institutions
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Sample Questions
Q1) Essentially,superannuation assets provide:
A) indefinite income when employees stop working.
B) indefinite income as long as employees continue to work.
C) limited income if an employee is injured and unable to work.
D) retirement income for employees.
Answer: D
Q2) Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A) investment broker
B) commercial banker
C) accounting firm
D) investment banker
Answer: D
Q3) An insurance company is not a depository financial institution.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Share Market and the Corporation
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Sample Questions
Q1) An investor holding an investment portfolio who purchases a put option is expecting:
A) share prices to go up in the short term.
B) share prices to fall in the short term.
C) interest rates to go up.
D) interest rates to go down.
Q2) The liability of shareholders in 'limited liability' companies means:
A) creditors of a company can call upon the shareholders in the case of company default to contribute an amount based only on the current market price of the shares.
B) shareholders are only liable for any amount that is unpaid on the shares of a company.
C) in the event of company default, the creditors have no claim on the shareholders for any contribution.
D) shareholders do not have a right to participate directly in the day-to-day management of a company.
Q3) A common measure of market liquidity is the ratio of turnover to market capitalisation.
A)True
B)False
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6
Chapter 5: Corporations Issuing Equity in the Share Market
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Sample Questions
Q1) When a company decides to issue an unsecured note to pay for a new machine,it has made a/an:
A) capital market decision.
B) money market decision.
C) financing decision.
D) investment decision.
Q2) When warrants are converted by a holder:
A) debt is decreased.
B) debt is decreased but equity also increases.
C) only the number of shares increases.
D) there is no impact on the company's capital structure.
Q3) Which of the following does NOT apply to a dividend reinvestment plan?
A) A dividend reinvestment plan forms additional equity financing for the company.
B) For a dividend reinvestment scheme the company typically bears the associated transaction costs.
C) Companies have encouraged shareholders to use dividend reinvestment plans.
D) Shareholders have the chance of purchasing additional shares through a dividend reinvestment plan.
Q4) Discuss the attractions of a private placement for a company.
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Chapter 6: Investors in the Share Market
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Sample Questions
Q1) The decision to pay cash dividends to shareholders is made by the:
A) company management.
B) shareholders at the annual meeting.
C) board of directors.
D) bond holders.
Q2) The majority of companies pay dividends twice a year to their:
A) bond holders.
B) secured bond holders.
C) shareholders.
D) board of directors.
Q3) Which ratio is a measure of liquidity that excludes inventories?
A) Current
B) Liquid
C) Debt to gross cash flow
D) Interest cover
Q4) The correlation of pairs of securities within a portfolio is called:
A) co-association.
B) correspondence.
C) covariance.
D) variance.
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Chapter 7: Forecasting Share Price Movements
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Q1) If a share price falls on four consecutive days of trading,share prices:
A) cannot be following a random walk
B) can still be following a random walk
C) are almost certain to decrease the next day
D) are almost certain to increase the next day
Q2) Firms that conduct business in a country's domestic market may be affected by a fall in the local exchange rate that leads to an increase in the rate of inflation.
A)True
B)False
Q3) In relation to fundamental analysis,which of the following is NOT a problem associated with rapid,unsustainable economic growth?
A) GDP growth between 1 and 2%
B) Current account of the balance of payments worsens
C) Pressure on wage growth falls
D) Inflationary pressures increase
Q4) What is program trading in relation to the share market?
Discuss any impact on share price movements.
Q5) What is a moving average model?
Explain how it is used in technical analysis.
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Chapter 8: Mathematics of Finance: An Introduction to Basic Concepts
and Calculations
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Sample Questions
Q1) When will a future value calculated with a simple interest rate exceed a future value calculated with compound interest at the same rate?
A) When the interest rate exceeds 100% per annum
B) When the investment period exceeds 50 years
C) When the initial deposit exceeds $1 billion
D) This is not possible with positive interest rates
Q2) If you receive $10 000 back as principal and interest at the end of two years for an initial investment of $9127 at the start of the term,what is the yield on your investment?
A) 4.37% per annum
B) 4.78% per annum
C) 8.73% per annum
D) 9.57% per annum
Q3) If you borrow $100 000 for 90 days with simple interest of 6.2% per annum,what is the total amount of interest paid on the loan?
A) $1528.77
B) $6200.00
C) $620.00
D) $15 287.67
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Chapter 9: Short-Term Debt
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Sample Questions
Q1) The most important function of an underwriter for a promissory note issue is to:
A) provide funding for the corporation.
B) approve the prospectus before distribution to the public.
C) dilute the corporation's equity.
D) buy the issue of securities from the corporation and resell it to investors.
Q2) A supplier who changes its trade credit from 3/10 n/30 to 4/15 n/40 is likely to find:
A) its accounts receivable decrease.
B) its risk of bad debts reduces.
C) its accounts receivable increase.
D) a decrease in sales.
Q3) What are some of the advantages of bill financing for a company over other forms of short-term debt?
Q4) Negotiable certificates of deposit:
A) pay interest, as they are interest-bearing accounts at a bank.
B) are short-term securities, issued by banks for financing purposes.
C) have a longer maturity date than promissory notes.
D) have little liquidity in the secondary market.
Q5) Discuss what factors influence the yield at which a commercial bill will be discounted
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Chapter 10: Medium-To-Long-Term Debt
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Sample Questions
Q1) If a company wishes to finance a printing press with a five-year life,it would be advisable to finance it with a/an:
A) overdraft.
B) bank bill.
C) commercial paper.
D) fully drawn advance.
Q2) In relation to long-term financing,a fully drawn advance is a:
A) a bank loan advanced for a precise period for an unspecified purpose.
B) A term loan where the full amount is provided at the start of the loan, usually for a specified purpose.
C) A term loan where the borrower has the option of putting its operating account in deficit up to an agreed limit.
D) A term loan where the bank does not pay out the loan until after a specified period.
Q3) Which of the following is a positive loan covenant?
A) A minimum working capital ratio
B) A maximum gearing ratio
C) A maximum level of unsecured debt
D) All of the given answers
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Chapter 11: International Debt Markets
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Q1) Which of the following does NOT relate to a convertible eurobond?
A) A convertible bond contains an option for the holder to receive the redemption proceeds in another form.
B) Convertible bonds may alleviate the foreign exchange risk of investors by being denominated in their currency.
C) Investors cannot usually participate in rights issues, in contrast with those investing in straight eurobonds.
D) For an equity-related convertible bond, an investor could benefit from increased equity prices.
Q2) According to the text.the part of the euromarkets providing intermediated bank financing is the:
A) eurobank markets.
B) eurocurrency markets.
C) eurobond markets.
D) euronote markets.
Q3) US commercial paper is an important short-term security for both US and foreign borrowers.Outline the features that have led to its importance.
Q4) Discuss the features of a eurobond issue.
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Page 13
Chapter 12: Government Debt, monetary Policy and the Payments System
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Q1) When a government's budget is in _____,it is required to issue new government securities,and when the budget is in _______,it may retire maturing debt and redeem some debt prior to maturity.
A) surplus; surplus
B) deficit; surplus
C) deficit; deficit
D) surplus; deficit
Q2) With a/an ______ stock issue,ownership is registered electronically and a receipt is issued.
A) bearer
B) submitted
C) inscribed
D) tendered
Q3) The Commonwealth Government currently issues Treasury notes with varying terms to maturity:
A) twice a year.
B) three times a year.
C) four times a year.
D) to match the government's main revenue receipt dates.
Q4) Discuss what factors influence financial system liquidity in Australia.
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Chapter 13: An Introduction to Interest Rate Determination and Forecasting
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Q1) All of the following will generally make a central bank increase interest rates,except:
A) excessive credit growth.
B) increasing surplus balance of payments.
C) large changes in price levels.
D) heavy downward pressure in the foreign exchange.
Q2) According to the liquidity premium theory of term structure,a mildly upward-sloping yield curve suggests the market is predicting constant short-term interest rates.
A)True
B)False
Q3) Using the pure expectations approach to the determination of interest rates,what is the shape of the yield curve indicated in the following data?
(<sub>0</sub>i<sub>1</sub>)9.47% per annum
(<sub>1</sub>i<sub>1</sub>)8.45% per annum
(<sub>0</sub>i<sub>2</sub>)8.96% per annum
A) Humped yield curve
B) Inverse yield curve
C) Normal yield curve
D) Variable yield curve
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Chapter 14: Interest Rate Risk
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Sample Questions
Q1) If the maturity of a portfolio of deposits for a bank is longer than its portfolio of term loans,the bank is exposed to:
A) interest rate risk.
B) reinvestment risk.
C) yield-to-maturity risk.
D) systematic risk.
Q2) When a financial institution matches its interest rate-sensitive assets with its interest-sensitive liabilities:
A) all assets have the same maturity.
B) all liabilities have the same maturity.
C) it typically earns no profit.
D) interest rate risk is neutralised.
Q3) Which of the following is NOT an external method of interest rate risk management?
A) Using an interest rate swap
B) Using financial futures
C) Using an off-balance-sheet strategy, such as a forward rate agreement
D) Having fixed-interest assets financed by fixed-interest liabilities and equity
Q4) Duration can be used for interest rate risk measurement.Explain how it is used.
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Page 16
Chapter 15: Foreign Exchange: The Structure and Operation
of the Fx Market
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Q1) Which of the following market participants tend to keep exchange rates the same in all the world markets?
A) Forward markets
B) Foreign exchange counter trades
C) Futures markets
D) Arbitrageurs
Q2) Financial institutions active in the FX markets include:
A) commercial banks.
B) commodity traders.
C) insurance companies.
D) all of the given answers.
Q3) For currency transactions,the spot exchange rate is the rate _______,and the forward exchange rate is the rate _______.
A) on that day; today
B) at some specified future date; today
C) today; on that date
D) on that date; at some specified future date
Q4) In relation to exchange rates,discuss a managed float regime,a crawling peg regime and a pegged exchange rate.
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Chapter 16: Foreign Exchange: Factors That Influence the Exchange Rate
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Q1) A decrease in inflation in the USA relative to that in another country could be expected to result in increased demand for goods from the USA and the demand curve would move to the right.
A)True
B)False
Q2) When a government places a direct limit on goods that may be imported,this intervention is called a tariff.
A)True
B)False
Q3) If the price of a local currency increases,then it follows:
A) holders of the local currency will see the price of foreign goods increase.
B) It is equivalent to an increase in the price of the foreign currency.
C) The demand for local currency will increase.
D) There will be an increase in the quantity of local currency supplied to the market.
Q4) If a regression analysis was run for the AUD/USD exchange rate and obtained the following coefficients,a<sub>1</sub> = 0.8 for (I<sub>US</sub> -I<sub>A</sub>),a<sub>2</sub> = 0.5 for (Y<sub>US</sub> - Y<sub>A</sub>)and a<sub>3</sub> = 0.6 for (i<sub>US</sub> -i<sub>A</sub>),explain the meaning of the coefficients.
Page 18
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Chapter 17: Foreign Exchange: Risk Identification and Management
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Q1) The risk for a company that future foreign currency denominated cash flows will vary owing to exchange rate movements is:
A) accounting exposure.
B) economic exposure.
C) transaction exposure.
D) translation exposure.
Q2) An exporter increasing its prices by 5% as a result of examining the risk of the foreign exchange rate dropping 5% is called:
A) lagging.
B) leading.
C) counter-trade.
D) mark-up.
Q3) An exposure to a currency with a lower standard deviation against an importer's local currency results in a lower degree of risk than exposure to a currency that has a higher standard deviation.
A)True
B)False
Q4) Discuss transaction exposure for a firm with only one or two international transactions.
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Chapter 18: An Introduction to Risk Management and Derivatives
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Q1) A government introducing legislation requiring carbon-emitting companies to lower their carbon emissions is an example of operational risk.
A)True
B)False
Q2) What is financial risk in relation to an organisation?
Q3) An option that gives the option buyer the right to sell the commodity or financial instrument specified in the contact at the exercise price is called:
A) an American option.
B) a European option.
C) a call option.
D) a put option.
Q4) A futures contract is an agreement that specifies the delivery of a commodity or financial security at a:
A) predetermined future date, with a price to be negotiated at the time of delivery.
B) predetermined future date, with a currently agreed-on price.
C) currently agreed-on price, with a delivery date to be negotiated later.
D) predetermined future date, with a price and delivery to be negotiated later.
Q5) What is operational risk in relation to an organisation?
Page 20
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Chapter 19: Future Contracts and Forward Rate Agreements
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Q1) In futures markets investors who expect to purchase future bonds may hedge against the effects of falling interest rates by:
A) taking an arbitrage position on bond futures contracts.
B) buying bond futures contracts.
C) selling bond futures contracts.
D) buying and selling similar bond futures contracts.
Q2) An Australian exporter with FX receivable in 3 months can hedge and lock in the price of the required foreign currency by:
A) buying AUD futures.
B) buying a currency swap.
C) selling AUD futures.
D) selling a currency swap.
Q3) Buying a September bank bill futures contract and simultaneously selling a June bank bill futures contract is a/an:
A) typical trading strategy for a hedger.
B) typical trading strategy for an arbitrageur.
C) example of a spread.
D) example of a straddle.
Q4) Comment briefly on the history of futures contracts.
Page 21
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Chapter 20: Options
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Q1) The option that is a highly leveraged option on individual stocks,with an exercise price of between one and ten cents,traded on the ASX Trade,with a European-type expiry,is a:
A) strip.
B) warrant.
C) barrier option.
D) LEPO.
Q2) In relation to options when interest rates increase,the:
A) price of call options generally falls.
B) price of the underlying share usually increases.
C) price of put options generally falls.
D) volatility of the underlying asset falls.
Q3) In the options markets for a put option,the:
A) seller is committed to receiving the underlying asset at a specified time.
B) buyer is committed to handing over the specified asset at a specified time.
C) buyer is committed to receiving the underlying asset at a specified time.
D) seller is committed to handing over the specified asset at a specified time.
Q4) Discuss a call option writer's risk exposure and some strategies they might use to minimise any possible loss exposure.
Q5) Discuss some characteristics of writers of covered and uncovered call options.
Page 22
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Chapter 21: Interest Rate Swaps, Cross-Currency Swaps
and Credit Default
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Q1) An interest rate swap in which the notional principal declines over time is called a/an:
A) amortised swap.
B) term swap.
C) zero-coupon swap.
D) none of the given choices.
Q2) An interest rate swap in which all the fixed payments are paid in one lump sum is called a/an:
A) amortised swap.
B) term swap.
C) zero-coupon swap.
D) none of the given choices.
Q3) In an interest rate swap,the notional principal:
A) is the principal relating only to the fixed rate payer.
B) is the principal relating only to the floating rate payer.
C) does not receive any interest payments.
D) is equal to the amount of the underlying debt borrowed.
Q4) As of December 2010 the Bank for International Settlements (BIS)estimated the notional value of currency swaps was USD16 347 billion.Discuss possible reasons for the growth in currency swaps.
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