Introduction to Finance Midterm
Exam
Course Introduction
Introduction to Finance provides students with a foundational understanding of the principles and practices that govern financial decision-making in both personal and business contexts. The course explores key topics such as the time value of money, risk and return, financial markets and institutions, valuation of assets, capital budgeting, and the basics of financial statement analysis. Through practical examples and case studies, students learn how to analyze financial information and apply financial concepts to real-world situations, preparing them for more advanced studies in finance and related fields.
Recommended Textbook
Financial Institutions and Markets 7th Edition by Ben Hunt
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14 Chapters
1469 Verified Questions
1469 Flashcards
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Page 2
Chapter 1: Overview of the Financial System
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Sample Questions
Q1) Tom and Ben both intend to invest $50,000 (that they have each received from an inheritance)in Macquarie Group shares that are currently trading at $50 per share.Tom prefers an unlevered investment, whereas Ben decides to borrow a further $50,000 at 10% pa so that he can initially purchase $100,000 in shares.Compare the potential returns and risks for a one year investment (ignoring transaction costs and taxes)for two investors assuming firstly, the share price increases from $50 to $60, and secondly, the share price falls from $50 to $40.
Answer: (i)The share price increases from $50 to $60. 11ea8310_cd09_fb3c_94c7_7502fc548447_TB4219_00 The leveraged investment results in a higher return on equity because the return on the additional shares purchased exceeds the cost of the debt.(ii)The share price falls from $50 to $40. 11ea8310_cd09_fb3d_94c7_2915040a3b32_TB4219_00 Leverage increases both the potential risk and return to equity holders.
Q2) Describe the rights of shareholders in a large company.
Answer: Shareholders are part-owners of the firm.In large companies owners of ordinary shares typically have the right to vote for the company's board of directors (and occasionally on other important matters that arise)and to receive dividends if the company decides to pay them.
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3
Chapter 2: The Payments System
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102 Flashcards
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Sample Questions
Q1) ________________ is the process by which ADIs agree on their payments system obligations whereas_________________ is the actual payment of ES funds.
A)DNS; RTGS
B)Clearing; settlement
C)DNS; settlement
D)Settlement; clearing
E)RTGS; settlement
Answer: B
Q2) Payments by the RBA increase aggregate exchange settlement balances.
A)True
B)False
Answer: True
Q3) RTGS can face liquidity problems which result from ADIs holding insufficient ES funds to meet their overall daily RTGS payment obligations.
A)True
B)False
Answer: False
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Chapter 3: Introduction to the Flow of Funds
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Sample Questions
Q1) There is little evidence of anomalies to contradict the efficient market hypothesis (EMH).
A)True
B)False
Answer: False
Q2) An important feature of over-the-counter markets is their transparency.
A)True
B)False
Answer: False
Q3) Exchanges organise trading between dealers.
A)True
B)False
Answer: False
Q4) A 'bear market' describes periods where the value of shares rise strongly.
A)True
B)False
Answer: False
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Chapter 4: Funds Management
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Sample Questions
Q1) Many insurance policies are similar to securities except for the contingent basis for future payments to the holder of the policy.
A)True
B)False
Q2) The superannuation schemes that are operated on a for-profit basis are the 'retail' and 'corporate' schemes.
A)True
B)False
Q3) Say your funds were invested with an active fund manager who performed relatively poorly last year.What factors would you need to consider before switching to another active manager?
Q4) Drawing upon the lessons learned from the collapse of HIH, how should general insurers manage their ability to meet their contingent liabilities?
Q5) Identify and briefly describe the main groups of fund managers.
Q6) What is the main similarity between momentum and contrarian investment strategies? What is the main difference between them?
Q7) Why are insurance companies classified as fund managers?
Q8) Explain the approach taken by passive investment managers.
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Chapter 5: Authorised Deposit-Taking Institutions
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116 Flashcards
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Sample Questions
Q1) Banks improve the credit risk of bills by accepting them.
A)True
B)False
Q2) The activities of loan originators in Australia were disrupted by the GFC.
A)True
B)False
Q3) Problems underlying the US sub-prime loans that triggered the GFC included which of the following?
A)Borrowers often had a poor employment record.
B)Borrowers often had a history of loan defaults.
C)LVR's were commonly 100 per cent.
D)It was assumed property prices would always rise.
E)All of these.
Q4) Bill acceptance:
A)uses commercial bills, which are secured short-term securities
B)is a common arrangement that allows companies to borrow from banks
C)exposes the investor to the credit risk of the borrower
D)enhances the bill's credit standing, allowing it to be issued at a lower yield
E)is a recent innovation in financing.
Q5) What are the sources of income for an ADI from intermediation?
Page 7
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Chapter 6: The Stability of Deposit-Taking Institutions
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Sample Questions
Q1) The RBA's responsibility for financial system stability is carried out in a number of ways.These do NOT include:
A)influencing the rate of economic activity and inflation through monetary policy
B)ensuring the payments system is sound
C)acting as lender of last resort to the banking system
D)being prepared to bail-out institutions that are 'too-big-to-fail'
E)regularly reviewing the stability of the domestic and global financial systems.
Q2) Explain how financial crises can be triggered and the RBA's role in overseeing financial system stability.
Q3) The quality of bank loans is of fundamental importance to the health of the banking system.
A)True
B)False
Q4) APRA is responsible for protecting depositors' funds.
A)True
B)False
Q5) Explain how ADIs have changed their management of funding risk post GFC.
Q6) Explain the purpose of the capital adequacy requirement (CAR).
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Chapter 7: The Money Market
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Sample Questions
Q1) A money market investor is exposed to:
A)credit risk
B)credit risk and less price risk than on longer-term securities
C)credit risk and more price risk than on longer-term securities
D)less price risk than on longer-term securities
E)more price risk than on longer-term securities.
Q2) Trades in the money market are settled on a T + 2 basis.
A)True
B)False
Q3) The main difference between promissory notes and BABs is that:
A)the yield on promissory notes is considered a 'risk-free' rate
B)promissory notes trade at a common yield
C)BABs are much riskier because the borrowers are less creditworthy
D)BABs are accepted before they are issued
E)All of these.
Q4) The board of the RBA makes changes to the cash-rate on an ad-hoc basis.
A)True
B)False
Q5) What are the objectives of monetary policy?
Q6) Describe the impact of the GFC on money market rates in Australia.
Page 9
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Chapter 8: The Bond Market
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Sample Questions
Q1) Discuss the determinants of movements in long-term yields.
Q2) Treasury bonds are long-term securities issued by state governments or their borrowing authorities.
A)True
B)False
Q3) Explain why the 'real rate' may change.
Q4) Of the following, which is NOT relevant to the calculation of the return earned on a Treasury bond investment?
A)The coupons received.
B)The interest earned on the reinvestment of these coupons.
C)The price paid for the bond.
D)The price the bond is sold for, or its face value if held to maturity.
E)All of these are relevant.
Q5) Clearly describe the trading arrangements, pricing conventions and settlement provisions in the Australian bond market.
Q6) A bond trade is settled after three business days.
A)True
B)False
Q7) Explain the impact of the GFC on bond issues in Australia.
Page 10
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Chapter 9: Shares
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Sample Questions
Q1) Settlement prices for share trades are determined using a dividend growth model and the market yield.
A)True
B)False
Q2) The maximum loss possible on an investment in shares can exceed 100% when the shares are:
A)ordinary
B)preference
C)redeemable
D)partly paid
E)convertible.
Q3) R.U.Ready Ltd wishes to raise $20 million.If the subscription price is $5, the current share price is $7.50, and there are 8 million shares outstanding, what will be the terms of the rights issue?
A)A 1-for-1 issue
B)A 1-for-2 issue
C)A 1-for-4 issue
D)A 1-for-5 issue
E)None of these.
Q4) Identify the advantages and disadvantages to a firm of becoming listed.
Page 11
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Chapter 10: The Share Market
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Sample Questions
Q1) Contracts for difference:
A)are only available to institutional investors
B)are a low risk product that allows an investment in shares without the cost of buying the shares
C)are exchange traded only
D)enable investors to trade shares on a geared (or leveraged)basis
E)have no risk of default
Q2) Briefly explain the contributions made by the share market to the financial system.
Q3) As a monopoly, the ASX does not have to contend with competition.
A)True
B)False
Q4) Since the share market operates on a trading-day basis, it has processes for matching orders entered before the trading day starts.
A)True
B)False
Q5) Briefly review the history of share trading in Australia and the ASX.Identify and explain the competitive pressures the ASX currently faces (or is likely to face).
Q6) Explain how share markets contribute to good corporate governance.
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Chapter 11: Foreign Exchange and Global Capital Markets
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Sample Questions
Q1) Advantages of electronic broking systems (over traditional telephone based FX trading)do NOT include:
A)greater transparency
B)narrower trading spreads
C)greater trading volumes and liquidity
D)more effective integration of FX front and back office functions
E)lower volatility.
Q2) An Australian bank issuing euro denominated bonds in Paris is an example of a eurobond.
A)True
B)False
Q3) Briefly explain the main theories of exchange rate movements and identify which have been most relevant to the AUD in recent years.
Q4) Japanese investors are assured of higher returns when they invest in Australian Treasury bonds because these bonds pay a much higher coupon rate than Japanese government bonds.
A)True
B)False
Q5) Identify and briefly explain the functions of FX markets.
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Chapter 13: Financial Futures
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Sample Questions
Q1) TDK Industries approached a bank in April to organise financing through a 180-day bank bill facility.The facility will begin in June using 90-day bank bills with a total face value of $10 million.The company wishes to know what they can do now to hedge against interest rate risk.Assume that June and September BAB futures contracts are currently trading at 95.70 and 95.30 respectively and that 90-day BBR in June is 4% and in September it is 5%.Demonstrate the effective interest rate established for the duration of the bill facility, through the use of bank bill futures contracts.
Q2) Futures contracts specify:
A)the contract item
B)the settlement date
C)how the contract can be settled
D)the settlement price.
E)All of these.
Q3) Speculators buy futures contracts whereas hedgers sell them.
A)True
B)False
Q4) What is a futures contract? How do they differ from forward contracts? Explain the positions that can be established in a futures contract and how they are used by traders.
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Page 14
Chapter 14: Swaps
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Sample Questions
Q1) An interest rate swap uncouples the source-of-finance decision from the basis of the interest payments.
A)True
B)False
Q2) A plain vanilla interest rate swap:
A)requires the fixed-rate borrower to make fixed-rate swap payments
B)is an arrangement that modifies a borrower's obligation to their lender
C)is the exchange of interest and principal payments
D)requires a floating-interest rate payment calculated using the 'swap rate'
E)is settled by a swap payment which is the difference between the floating- and fixed-rate interest payments calculated on an agreed notional principal.
Q3) Suppose that firm A can borrow at BBR+60bps in the money market or at 7.5% in the two-year fixed-rate market, whereas bank B can borrow at BBR in the money market and at 6.5% in the two-year fixed-rate market.Explain the comparative advantages of these two borrowers and demonstrate how they could exploit these advantages to provide each with a lower interest rate, assuming that the firm wants fixed-rate funds and the bank wants floating-rate funds.
Q4) Explain how an FX swap differs from a cross-currency swap.
Q5) Explain the main features and use of overnight indexed swaps.
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Chapter 15: Exchange-Traded Options
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140 Flashcards
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Sample Questions
Q1) Discuss the features of ASX share options.
Q2) An interest rate cap can be established by buying put options on successive BAB futures contracts.
A)True
B)False
Q3) An option can be exercised only by its holder.
A)True
B)False
Q4) The long position will only pay the option premium if they decide to exercise the option.
A)True
B)False
Q5) Call options:
A)have intrinsic value equal to S - X
B)have positive intrinsic value when S > X
C)have intrinsic value X > S
D)have negative intrinsic value when X > S
E)have positive intrinsic value when S > X and negative intrinsic value when X > S
Q6) What are interest rate 'caps' and 'floors'?
Page 16
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