Financial Markets and Institutions
Textbook Exam Questions
Course Introduction
This course explores the fundamental structure and function of financial markets and institutions within the global economy. Students will examine the roles of banks, non-bank financial intermediaries, and regulatory bodies, as well as the mechanisms through which capital is allocated and risk is managed. Key topics include the determination of interest rates, the functioning and impact of money and capital markets, asset pricing, central banking, and the implications of financial regulation. Through case studies and real-world examples, students gain a comprehensive understanding of how financial markets operate, the products traded within them, and their critical importance for economic stability and growth.
Recommended Textbook
Investments Concepts and Applications 5th Edition by Richard Heaney
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Chapter 1: The Investment Decision
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Q1) A continuously compounded return is always less than the equivalent discrete return.
A)True
B)False
Answer: True
Q2) The value of an investment at the end of each of four years is shown above.What is the geometric cumulative return over the four years?
A) \(15.1 \%\)
B) \(24.63 \%\)
C)\(18.7 \%\)
D) \(19.7 \%\)
Answer: B
Q3) The use of discrete returns ignores compounding.
A)True
B)False
Answer: True
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Chapter 2: Australian Financial Markets
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Sample Questions
Q1) Assume an investor buys an apartment for investment purpose for $400,000.The purchase is financed with 50,000 of the investor's money and the rest,$350,000,is borrowed at a rate of 8%.Suppose the apartment earns rental income of $10,000 and the investor earns $100,000 p.a.and the marginal tax rate is 37%.Calculate the loss on the property.
A) \(\$ 11,340\)
B) \(\$ 6,660\)
C) \(\$ 10,360\)
D) \(\$ 17.640\)
Answer: A
Q2) According to ASX short-selling rules,all short-sold positions must be settled within three days.
A)True
B)False
Answer: False
Q3) The culmination of the state stock exchanges eventuated in 1962.
A)True
B)False
Answer: False
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Chapter 3: The International Investment Environment
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Sample Questions
Q1) A foreign exchange rate of USD/AUD 0.9925-0.9950 indicates:
A) \(\text { that the bank will buy 1USD for AUD0.992s }\)
B) \(\text { that the bank will sell 1AUD for USDD.9925 }\)
C) \(\text { that the bank will buy 1USD for AUD } 9950\)
D) none of these answers
Answer: B
Q2) Which are possible problems of emerging markets?
A) High volatility
B) Overheated
C) Not enough resources devoted to market
D) All of these answers
Answer: D
Q3) The NZ Alternative Market (NZAX)is the New Zealand's main board and has over 150 listed securities.
A)True
B)False
Answer: False
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Chapter 4: Financial Management: Derivative Instruments
and Information Sources
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Sample Questions
Q1) Forward rate agreements (FRA)allow parties to exchange interest rate exposures.
A)True
B)False
Q2) The Consumer Price Index (CPI)is designed to capture price movements in the general economy.
A)True
B)False
Q3) Which information is specified for those highly standardised contracts?
A) The exercise date
B) The exercise price
C) The number and description of the underlying asset
D) All of these options
Q4) Contracts for difference (CFDs)enable traders to participate in either bull or bear markets.
A)True B)False
Q5) With futures the All Ordinaries Index (AOI)can be traded as separate security. A)True
B)False
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Chapter 5: Money Market Securities
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Sample Questions
Q1) Given that the quoted yield for a 90-day dealer's bill is 4.14%,what is the price of the bill,if it has a face value of $100 000?
A) \( \$ 98 \quad 989 \)
B) \( \$ 94 \quad 771 \)
C) \( \$ 95 \quad 372 \)
D) \( \$ 97 \quad 938 \)
Q2) Which of the following term structure theories predicts an upward-sloping yield curve?
A) preferred habitat
B) expectations
C) liquidity premium
D) segmented market
Q3) The preferred habitat theory of term structure generally implies an upward-sloping yield curve.
A)True
B)False
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Chapter 6: Bonds
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Q1) A $100 000 bond has a term to maturity of one year,with half-yearly coupons set at 12% p.a.Calculate the convexity of the bond in periods if the yield is 9%.
A) \( 2.576 \)
B) \( 2.888 \)
C) \( 3.227 \)
D) \( 4.672 \)
Q2) A $50 000 bond has a term to maturity of 20 years with half-yearly coupons set at 7% p.a.Calculate the change in bond price if the yield changes from 8.5% to 8%.
A) \( -\$ 1625.42 \)
B) \( -\$ 1586.81 \)
C) \( \$ 1587.81 \)
D) \( \$ 1625.42 \)
Q3) Call risk refers to the uncertainty associated with future reinvestment rates.
A)True
B)False
Q4) Duration is a concept that is useful in assessing a bond's credit risk.
A)True
B)False
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Chapter 7: Investor Preferences and Portfolio Concepts
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Sample Questions
Q1) The typical Von Neumann-Morgenstern utility is convex.
A)True
B)False
Q2) A risk-free asset is defined as one whose cash flows are not certain across all possible states of the world.
A)True
B)False
Q3) In estimating the covariance matrix,the Sharpe diagonal approach for 10 assets involves how many calculations?
A) 24
B) 32
C) 82
D)62
Q4) The variance of a portfolio is a non- linear function of the weight invested in the risky asset.
A)True
B)False
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Chapter 8: Risky Asset Pricing Models and the Capm
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Sample Questions
Q1) Which of the following is not a characteristic of a portfolio that lies on both the capital market line and the security market line?
A) low variance
B) zero correlation with the market
C) both a and b
D) efficiency
Q2) Assume the CAPM is the correct asset pricing model,and the risk-free rate of return is 6% and the market has an expected return and a standard deviation of 16% and 0.10%,respectively.An investor has a portfolio consisting of equal amounts in assets A and B.Asset A has an expected return of 8%.If the portfolio has an expected return of 10%,what is the covariance between asset B and the market portfolio?
A) \( 2.000 \)
B) \( 3.000 \)
C) \( 6.000 \)
D)\( 7.000 \)
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Chapter 9: Alternative Risky Asset Pricing Models
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Q1) The CCAPM assumes that a functioning capital market exists that allows investors to achieve their desired level of personal consumption.
A)True
B)False
Q2) A major difference between the application of the ICAPM compared with the domestic CAPM is:
A) estimation of beta
B) no uniform risk-free rate
C) identification of market portfolio
D all of the above
Q3) Which of the following is NOT a factor used by Chen,Roll and Ross (1986)in their empirical test of the APT?
A) industrial production
B) expected inflation
C) oil prices
D) unanticipated change in the term structure
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11
Chapter 10: Concepts and Applications of Market Efficiency
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Sample Questions
Q1) The production of _____ is more likely to be greater during trading periods.
A) private information
B) public information
C) private and public information
D) neither private nor public information
Q2) By using the Consumer Price Index (CPI)as an economic indicator,it can be argued that it has a:
A) significant negative relationship between share prices and unanticipated inflation
B) significant positive relationship between share prices and anticipated inflation
C) significant positive relationship between consumer goods prices and anticipated inflation
D) insignificant negative relationship between share prices and anticipated inflation
Q3) It is impossible for markets to incorporate all information into prices.
A)True
B)False
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Chapter 11: Equity Valuation Models
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Q1) You work for an arm of a major merchant bank specialising in Australian equity stocks.It is company policy to use the earnings capitalisation model for valuation purposes and to calculate EPS forecasts using two approaches: a random walk (RW)and a random walk with $0.05 drift (RWD).The EPS for PF Corporation is currently $0.35,and in the previous year the EPS was $0.32.PF Corporation has a current share price of $4.70 and a cost of capital of 7%.Which of the following best represents your recommendation about PF Corporation under each approach?
A) both the RW and RWD approaches suggest buying the stock
B) both the RW and RWD approaches suggest short-selling the stock
C) the RW suggests a buy strategy, while the RWD suggests a short-sell strategy
D) the RWD suggests a buy strategy, while the RW suggests a short-sell strategy
Q2) The correct price of a share with a cost of capital of 25% p.a.that pays $0.28 p.a.dividends in perpetuity is:
A) \( \$ 1.12 \)
B) \( \$ 1.20 \)
C) \( \$ 0.89 \)
D) \( \$ 0.07 \)
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Page 13
Chapter 12: Macro- and Industry Analysis of Share Markets
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Q1) An increase in the level of inflation will unambiguously lead to an increase in the retention rate of the firm.
A)True
B)False
Q2) The two extra industry sectors provided for the Australian market above that in the typical GICS classification are:
A) Mining and Healthcare
B) Property Trusts and Financials excluding Property Trusts
C) Mining and Property Trusts
D) Gold and Resources
Q3) The top-down investment approach identifies mispriced securities,and then forms a portfolio from them.
A)True
B)False
Q4) The market value of all goods and services produced during a given time period is called industrial production.
A)True B)False
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Chapter 13: Qualitative Stock Selection
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Q1) Fama and French (1992)find that,over a 20-year period in the USA,__________ outperformed __________.
A) blue-chip shares; speculative shares
B) speculative shares; glamour shares
C) growth shares; value shares
D) none of these choices
Q2) When the market breaks through the moving average line from below,a technical analyst would probably suggest that it is a good time to ___________.
A)buy the stock
B)hold the stock
C)sell the stock
D)short the stock
Q3) Charles Dow postulated that share price movements followed three types of behavior patterns over time,namely;pricing follows major trends,intermediate trends and long term trends.
A)True
B)False
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Chapter 14: Quantitative Company Analysis
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Q1) The accounting standards allow firms to use discretion in their choice of accounting methods.
A)True
B)False
Q2) Generally accepted accounting practices (GAAP),provide for:
A) flexibility
B) a uniform set of rules
C) non discretion to the use of accounting methods
D) a clearer view of operating profit after tax
Q3) The presence of fixed production costs causes operating profit to vary more than __________ over the business cycle.
A) variable costs
B) net profit
C) total costs
D) sales revenue
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Chapter 15: Futures and Forward Contracts
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Sample Questions
Q1) If there is no risk premium in the futures market then:
A) the futures price equals the spot price
B) the futures price at maturity will equal the expected spot at expiry
C) the current futures price equals the expected spot at expiry
D) all of these choices
Q2) The basis converges to zero over the life of the futures contract because:
A) futures contracts are more actively traded towards the end of their life
B) futures contracts are less actively traded towards the end of their life
C) the spot and futures prices converge at expiry
D) none of these choices
Q3) Interest rate swaps involve the exchange of ________________.
A)actual fixed-rate bonds for actual floating-rate bonds
B)actual floating-rate bonds for actual fixed-rate bonds
C)net interest payments and an actual principal swap
D)net interest payments based on notional principal,but no exchange of principal
Q4) Short futures contract requires no cash to change hands when initiated?
A)True
B)False
Page 17
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Chapter 16: Option Contracts
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Sample Questions
Q1) A put option with 60 days to maturity,exercise price of $12.00,underlying spot price of 14.00 and risk-free rate of 7% p.a.is valued at $0.10.What is the value of a call option with the same characteristics? (Assume the put option premium is correctly priced and there are no dividends. )
A) \( \$ 2.10 \)
B) \( \$ 2.16 \)
C) \( \$ 2.24 \)
D) \( \$ 2.40 \)
Q2) In relation to hedging when the short futures position is combined with the long asset position,the net effect is that wealth is not altered with changes in price. A)True
B)False
Q3) A futures contract differs from an option contract in that the holder of a futures contract has a right but not an obligation to settle on a particular date.
A)True B)False
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Chapter 17: Advanced Issues in Options
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Q1) Convertible notes typically have a window for conversion that is unlimited.
A)True
B)False
Q2) Options written on the 90-day bank bill contract have:
A) a face value of \( \$ 1000000 \)
B) exercise price set in intervals of \( 0.25 \% \)
C) a minimum price movement of \( 0.05 \% \)
D) all of the above
Q3) The term to maturity of company-issued warrants tends to be greater than that of standard exchange-traded options.
A)True
B)False
Q4) The Garman Kohlhagen (1983)model may be used to price an European-type option where:
A) the exchange rate is assumed normally distributed
B) foreign and domestic interest rates are assumed known at all maturities
C) foreign and domestic interest rates are non-stochastic at all maturities
D) all of these options
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Chapter 18: Alternative Investments
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Q1) Moskowitz and Vissing-Jørgensen (2002)estimate that,for those households that hold private equity,that investment represents 41% of household wealth.
A)True
B)False
Q2) Once a business is at the stage of the IPO,how much does the lead venture capitalist,on average,hold of the firm?
A) \( 7-10 \% \)
B) \( 12-15 \% \)
C) \( 14-17 \% \)
D) \( 20-24 \% \)
Q3) After five years post listing,non-venture-backed IPOs earn a cumulative return of:
A) \( 16 \% \)
B) \( 23 \% \)
C) \( 39 \% \)
D \( 45 \% \)
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Page 20
Chapter 19: Portfolio Management
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Sample Questions
Q1) Funds that set aside money during the working lives of people to cater for their financial needs during retirement are called:
A) unit trusts
B) superannuation funds
C) life office funds
D) individual funds
Q2) __________ involves purchasing a portfolio of bonds that produce cash flows matching closely those cash flows of the underlying liability.
A) Cash matching
B) Immunisation
C) Hedging
D) none of these choices
Q3) Cash matching is typically used to match coupon payments,but not face value payments at maturity.
A)True
B)False
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Chapter 20: Performance Evaluation of Managed Funds
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Q1) Faff,Gallagher and Wu (2005)in their research find that fund managers have been ________ to deliver superior returns through _________________,although there is evidence of value enhancement in the Australian equities asset class.
A) able; property acquisitions
B) consistent; superannuation funds
C) continuing; hedge funds
D) unable; tactical asset allocation
Q2) Portfolio A has a return of 5% and a standard deviation of 10%.Portfolio B has a return of 8% and a standard deviation of 12%.If the risk-free rate is 2% portfolio,then the Sharpe indices of A and B are:
A) \( A=0.3 ; B=0.5 \)
B) \( \mathrm{A}=0.25 ; \mathrm{B}=0.25 \)
C) \( \mathrm{A}=0.35 ; \mathrm{B}=0.1 \)
D) \( \mathrm{A}=0.5 ; \mathrm{B}=0.1 \)
Q3) The Treynor measure captures the risk-premium per unit of overall risk.
A)True
B)False
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Page 22