Multiple choice

1. The exchange of goods and services is made more efficient by:

○ A. Barter
○ B. Money
○ C. Credit
○ D. Trade agreements
2. Short selling is:
○ A. Buying a financial product to sell later
○ B. Selling a financial product that the seller owns
○ C. The sale of a financial product that the seller does not own
○ D. A long-term investment strategy
3. The term ‘medium of exchange' for money refers to its use as:
○ A. A measure of value
○ B. A store of value
○ C. Something that is widely accepted as payment for goods and
services
○ D. A unit of account
4. The role of money as a store of value refers to:
○ A. Its ability to be used in future transactions
○ B. Its use in measuring value
○ C. The fact that money allows worth to be stored readily
○ D. Its function as a medium of exchange
5. Money increases economic growth by assisting transfers from:
○ A. Borrowers to savers
○ B. Savers to borrowers
○ C. Consumers to producers
○ D. Governments to businesses
6. 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. Medium of exchange
○ B. Store of value
○ C. A claim to future cash flows
○ D. Unit of account
7. Buyers of financial claims lend their excess funds because they:
○ A. Want immediate returns
○ B. Want surplus funds in the future
○ C. Need to reduce risk
○ D. Seek to diversify their portfolio
8. Sellers of financial claims promise to pay back borrowed funds:
○ A. Immediately
○ B. Based on their expectation of having surplus funds in the future
○ C. Without any conditions
○ D. Only if they make a profit
9. A savings-surplus unit is an entity:
○ A. Which spends more than its income
○ B. Which has an income that exceeds its spending
○ C. That borrows funds regularly
○ D. That invests in high-risk assets
10. The process of facilitating the flow of funds between borrowers
and lenders performed by the financial system:
○ A. Decreases the rate of economic growth of a country
○ B. Has no impact on economic growth
○ C. Increases the rate of economic growth of a country
○ D. Only benefits financial institutions
11. Both real and financial assets have four principal attributes that are
significant factors in the investment decision process. These are:
○ A. Liquidity, capital gain, risk, return or yield
○ B. Liquidity, risk, return or yield, time pattern of future cash flows
○ C. Capital gain, risk, return or yield, price and cash flow volatility
○ D. Liquidity, capital gain, time pattern of future cash flows, price
and cash flow volatility
12. Which of the following is NOT associated with characteristics of
shares?
○ A. Ownership in a company
○ B. Voting rights
○ C. A fixed interest payment
○ D. Potential for capital gains
13. A financial institution that obtains most of its funds from deposits
is a/an:
○ A. Investment bank
○ B. Insurance company
○ C. Commercial bank
○ D. Mutual fund
14. Institutions that specialise in off-balance-sheet advisory services
are called:
○ A. Commercial banks
○ B. Insurance companies
○ C. Mutual funds
○ D. Investment banks
15. A financial intermediary that receives premium payments which
are used to purchase assets to cover future possible payments is a:
○ A. Commercial bank
○ B. Mutual fund
○ C. Investment bank
 ○ D. Life insurance office
16. 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:
○ A. Commercial banks
○ B. Investment banks
○ C. Contractual savings institutions
○ D. Mutual funds
17. Financial institutions that raise the majority of their funds by
selling securities in the money markets are:
○ A. Commercial banks
○ B. Investment banks
○ C. Finance companies
○ D. Mutual funds
18. Financial institutions that are formed under a trust deed and attract
funds by inviting the public to buy units are:
○ A. Commercial banks
○ B. Investment banks
○ C. Unit trusts
○ D. Mutual funds
19. Which of the following is NOT a term associated with shares?
○ A. Dividend
○ B. Equity
○ C. Ownership
○ D. Contractual claim
20. Which of the following is NOT a characteristic commonly
associated with preference shares?
○ A. Fixed dividend
○ B. Priority over common shares in dividend payments
 ○ C. Higher ranking than bond holders on claims on assets
○ D. No voting rights
21. Long-term debt financing instruments used by companies are
called:
○ A. Bonds
○ B. Debentures
○ C. Shares
○ D. Options
22. When a borrower issues a debt instrument with collateral specified
in its contract this debt instrument is called:
○ A. Unsecured
○ B. Secured
○ C. Negotiable
○ D. Convertible
23. Debt instruments that can be easily sold and transferred in the
financial markets are called:
○ A. Non-negotiable
○ B. Secured
○ C. Negotiable
○ D. Convertible
24. Which of the following is NOT a feature of a debt instrument?
○ A. Fixed interest payments
○ B. Maturity date
○ C. Principal repayment
○ D. Their prices do not fluctuate as much as shares
25. Which of the following is NOT a feature of futures contracts?
○ A. Standardized terms
○ B. Traded on exchanges
○ C. The contract price is settled at the end of the contract
 ○ D. Obligation to buy or sell
26. Which of the following is NOT a feature of forward contracts?
○ A. Customized terms
○ B. Traded over-the-counter
○ C. Obligation to buy or sell
○ D. Forward contracts are closed out by trading an opposite contract
27. Which of the following is NOT a feature of option contracts?
○ A. The right to buy is called a call option
○ B. The right to sell is called a put option
○ C. The buyer pays a premium
○ D. The right to buy is called a put option
28. Which of the following is NOT a feature of swaps?
○ A. Exchange of cash flows
○ B. Interest rate swaps exchange principal at the beginning and the
end
○ C. Used to manage risk
○ D. Can involve different currencies
29. 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. To provide liquidity
○ C. To facilitate investment
○ D. To enable price discovery
30. Financial markets:
○ A. Facilitate the exchange of financial assets
○ B. Provide information about prices of financial assets
○ C. Provide a channel for funds to flow from savers to borrowers
○ D. All of the above
31.The most important function of a financial market is to:
 A. Provide investment advice
 B. Regulate financial institutions
 C. Facilitate the flow of funds between lenders and borrowers
 D. Offer insurance services
32.Financial markets:
 A. Only deal with government securities
 B. Issue claims on future cash flows of individual borrowers directly to
lenders
 C. Provide only short-term funding
 D. Are limited to stock exchanges
33.A primary financial market is one that:
 A. Trades existing financial assets
 B. Deals with government bonds only
 C. Involves the sale of financial assets for the first time
 D. Is restricted to institutional investors
34.A secondary financial market is one that:
 A. Issues new financial instruments
 B. Deals exclusively with derivatives
 C. Involves the sale of existing financial assets
 D. Is regulated by central banks
35.Purchasing shares on the Australian Securities Exchange is an example
of:
 A. A primary market transaction
 B. A direct financing transaction
 C. An over-the-counter transaction
 D. A secondary market transaction
36.When a security is sold in the financial markets for the first time:
 A. Funds flow from the saver to the issuer
 B. It is considered a secondary market transaction
 C. It does not involve any intermediaries
 D. It is always a government bond
37.Which of the following is NOT an example of primary market
transactions?
 A. Initial public offering (IPO)
 B. New bond issuance
 C. A mortgage bond
 D. Private placement
38.A ‘primary market’ is a market:
 A. For trading existing securities
 B. Where borrowers sell new financial instruments to buyers
 C. For government securities only
 D. For secondary transactions
39.Buying bonds in the capital markets is an example of:
 A. A secondary market transaction
 B. A primary market transaction
 C. A direct financing transaction
 D. An indirect financing transaction
40.The market where existing securities are sold is the:
 A. Primary market
 B. Capital market
 C. Secondary market
 D. Money market
41.When a large company issues a financial instrument into the financial
markets:
 A. It buys back shares
 B. It issues dividends
 C. It engages in a secondary market transaction
 D. It sells a financial claim
42.Secondary markets:
 A. Allow borrowers to raise long-term funds
 B. Facilitate capital-raising in the primary market
 C. Do not raise new funds but offer liquidity
 D. All of the given answers
43.The flow of funds through financial markets increases the volume of
savings and investment by:
 A. Reducing interest rates
 B. Increasing government spending
 C. Providing savers with a variety of ways to lend to borrowers
 D. Limiting the availability of credit
44.Which of the following statements is NOT a feature of financial markets?
 A. They facilitate the exchange of financial assets
 B. They provide information about prices of financial assets
 C. They provide a channel for funds to flow from savers to borrowers
 D. Financial markets generally deal only with the purchase and sale of
government securities
45.Which of the following is NOT true—a well-functioning financial
market:
 A. Provides liquidity
 B. Facilitates price discovery
 C. Offers a variety of financial instruments
 D. Has a selection of financial assets with similar timings of cash flow
46.Financial markets:
 A. Only involve primary transactions
 B. Only involve secondary transactions
 C. Are limited to stock exchanges
 D. Involve both primary and secondary transactions
47.Direct financing allows a borrower to:
 A. Avoid financial intermediaries
 B. Reduce borrowing costs
 C. Increase transaction speed
 D. Diversify their funding sources
48.Which of the following is NOT a possible disadvantage of direct
financing?
 A. High transaction costs
 B. Lack of liquidity
 C. Difficulty in finding investors
 D. Cost of the financial intermediary involved
49.An issue of debentures is an example of:
 A. Indirect financing
 B. Equity financing
 C. A direct form of funding
 D. Government funding
50.An example of an indirect form of funding is a/an:
 A. Initial public offering (IPO)
 B. Corporate bond issuance
 C. Term loan
 D. Private placement
51.Which of the following is NOT a major advantage of direct finance?
 A. Greater control over funding terms
 B. Potentially lower costs
 C. Direct relationship with investors
 D. Direct finance reduces search and transactions costs
52.Financial intermediaries:
 A. Act as a third party by holding a portfolio of assets and issuing claims
based on them to savers
 B. Only deal with government securities
 C. Do not engage in maturity transformation
 D. Are limited to commercial banks
53.The flow of funds between lenders and borrowers is channelled:
 A. Directly through primary markets
 B. Only through secondary markets
 C. Indirectly through financial intermediaries
 D. Exclusively through government bonds
54.‘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. Risk transformation
 B. Maturity transformation
 C. Liquidity transformation
 D. Credit transformation
55.The main role of financial intermediaries is to:
 A. Borrow funds from surplus units and lend them to borrowers
 B. Issue new financial instruments
 C. Regulate financial markets
 D. Provide investment advice
56.Financial intermediaries pool the funds of:
 A. Large corporations
 B. Government entities
 C. Many small savers and make loans to many borrowers
 D. International investors
57.Small savers prefer to use financial intermediaries rather than lending
directly to borrowers because:
 A. Financial intermediaries offer the savers a wide portfolio of financial
instruments
 B. Direct lending is risk-free
 C. It is required by law
 D. It guarantees higher returns
58.Financial intermediaries can engage in credit risk transformation because
they:
 A. Have access to government guarantees
 B. Only lend to high-credit borrowers
 C. Develop expertise in lending and diversifying loans
 D. Avoid risky investments
59.When a financial intermediary collects together deposits and lends them
out as loans to companies, it is engaging in:
 A. Credit transformation
 B. Maturity transformation
 C. Liquidity transformation
 D. Asset transformation
60.‘Liquidity’ in financial terms is:
 A. The ability to generate profit
 B. The ease with which an asset can be sold at the published market price
 C. The stability of an asset’s value
 D. The potential for capital gains
61.When an individual has immediate access to their funds from an account
with a financial intermediary, the intermediary is engaging in:
 A. Risk management
 B. Capital allocation
 C. Liquidity management
 D. Credit assessment
62.When a financial intermediary can repeatedly use standardised
documents, it is engaging in:
 A. Risk diversification
 B. Credit enhancement
 C. Liquidity provision
 D. Economies of scale
63.According to the textbook, all of the following are financial
intermediaries except a/an:
 A. Commercial bank
 B. Insurance company
 C. Mutual fund
 D. Share broking firm
64.An example of a financial intermediary is:
 A. A stock exchange
 B. A central bank
 C. A credit rating agency
 D. An insurance company
65.The main participants in the financial system are individuals,
corporations, and governments. Individuals are generally ______ of funds
and corporations are net ________ of funds.
 A. Users; suppliers
 B. Borrowers; lenders
 C. Suppliers; users
 D. Investors; borrowers
66.Which of the following borrowers would pay the lowest interest rate on
debts of equal maturity?
 A. A large corporation
 B. A small business
 C. A municipal government
 D. The Commonwealth Government
67.Generally, in the long term, a government:
 A. Is a net borrower of funds
 B. Is a net lender of funds
 C. Has balanced budgets
 D. Does not participate in financial markets
68.The _______ is created by a financial connection between providers and
users of short-term funds.
 A. Capital market
 B. Derivatives market
 C. Money market
 D. Foreign exchange market
69.Which of the following is NOT usually a short-term discount security?
 A. Treasury bills
 B. Commercial paper
 C. Bankers’ acceptances
 D. Unsecured notes
70.Which of the following is NOT a feature of the money market?
 A. High liquidity
 B. Short-term maturities
 C. Low risk
 D. It only operates as a market in which new security issues are created
and marketed
71.The market that involves the buying and selling of short-term securities is
the:
 A. Capital market
 B. Money market
 C. Derivatives market
 D. Foreign exchange market
72.A large company with a temporary surplus of funds is most likely to buy:
 A. Bank bills
 B. Corporate bonds
 C. Equity shares
 D. Real estate
73.A company that issues promissory notes into the short-term debt markets
is conducting a transaction in the:
 A. Commercial paper market
 B. Capital market
 C. Derivatives market
 D. Foreign exchange market
74.A company with a high credit rating can issue _____ directly into the
money markets.
 A. Treasury bills
 B. Bankers’ acceptances
 C. Certificates of deposit
 D. Commercial paper
75.The market that generally involves the buying and selling of discount
securities is the:
 A. Capital market
 B. Money market
 C. Derivatives market
 D. Foreign exchange market
76.A source of short-term liquidity funding for banks is the issue of:
 A. Treasury bills
 B. Commercial paper
 C. Certificates of deposit
 D. Corporate bonds
77.The market that includes individuals, companies, and governments in the
buying and selling of long-term debt and equity securities is the:
 A. Money market
 B. Derivatives market
 C. Capital market
 D. Foreign exchange market
78.When a company issues a long-term debt instrument with no security
attached it is selling _____ to investors.
 A. Secured bonds
 B. Convertible bonds
 C. Unsecured notes
 D. Preferred shares
79.From the viewpoint of a corporation, which source of long-term funding
does not have to be repaid?
 A. Equity
 B. Bonds
 C. Loans
 D. Debentures
80.For additional funding, a company decides to issue $15 million in
corporate bonds. The securities will be issued into the:
 A. Money markets
 B. Derivatives markets
 C. Foreign exchange markets
 D. Capital markets
81.The major financial assets traded in the capital market are:
 A. Treasury bills and commercial paper
 B. Bankers’ acceptances and certificates of deposit
 C. Derivatives and foreign currencies
 D. Shares and bonds
82.Compared with Treasury bonds, Treasury notes generally:
 A. Have longer maturities
 B. Have higher interest rates
 C. Are issued by corporations
 D. Are discount securities
83.If you purchase an Australian government bond, that bond is:
 A. An asset to you but a liability for the Australian government
 B. A liability to you but an asset for the Australian government
 C. Neither an asset nor a liability
 D. Both an asset and a liability
84.When government borrowing reduces the amount of funds available for
lending to businesses, this is called:
 A. Inflation
 B. Crowding out
 C. Deflation
 D. Quantitative easing
85.All of the following are key financial services provided by the financial
system except:
 A. Risk management
 B. Liquidity provision
 C. Profitability
 D. Information dissemination
86.Which of the following would be most likely to use financial markets to
borrow?
 A. A small business needing short-term funding
 B. An individual looking to buy a house
 C. A government authority wanting to borrow to finance highway
construction
 D. A corporation issuing equity
87.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?
 A. Futures contracts, options, swaps
 B. Treasury bills, commercial paper, certificates of deposit
 C. Unsecured notes, ordinary shares, debentures, bills of exchange
 D. Preferred shares, convertible bonds, mortgage-backed securities
88.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. Capital flow
 C. Trade balance
 D. Foreign exchange
89.As a broad generalisation, in the sectorial flow of funds households are
typically:
 A. A deficit sector
 B. A surplus sector
 C. A balanced sector
 D. An investment sector
90.The flow of funds between the sectors of a nation-state:
 A. Only involves government transactions
 B. Is limited to domestic transactions
 C. Excludes international trade
 D. Relates to all of the given answers
True / False Questions
91.Money allows economic and financial transactions to be carried out more
efficiently than bartering. True/False
92.Four main attributes of an asset are return, risk, volatility and time-pattern
of cash flows. True/False
93.Deficit entities purchase financial instruments that offer the lowest
interest rate. True/False
94.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. True/False
95.A well-functioning financial system enables participants to readily
change the composition of their financial assets portfolio. True/False
96.Monetary policy relates to actions of a central bank to control the amount
of money for transactions in an economy. True/False
97.The government organisation responsible for the conduct of monetary
policy is the prudential supervisor of a country's banks. True/False
98.Investment banks are contractual organisations that make up contracts for
their corporate clients and governments. True/False
99.In recent years, depository financial institutions have obtained a large
proportion of their funds from the financial markets directly. True/False
100. A stock is a debt security that promises to make specified interest
payments. True/False
101. Margin trading is the sale of a financial product that the seller does
not own and who intends to buy back at a lower price later. True/False