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University of New South Wales
School of Banking and Finance
FINS 1612 Capital Markets and Institutions
Final Examination
Session 2 2006
Instructions:
Time allowed: 2 hours + 10 minutes reading time
During reading time the candidate is not to make any notes.
Total number of questions: 90 (1 mark each)
All questions are to be answered.
This exam constitutes 50% of your grade.
Write and sign your name and student number on the examination question paper.
Also enter your name and registration number in the spaces provided on the multiple
choice answer sheet.
All answers must be recorded in pencil on the multiple choice answer sheet provided
The examinations office will provide calculators for the exam.
The candidate is not allowed to use any other examination aid.
This paper may NOT be taken out of the examination room.
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The following formula may be of use to you:

1 (1 i) n
C
A(1 i ) n (1 i) k
i

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Please identify the letter of the choice that best completes the statement or answers the
question and record your selection on the answer sheet provided. There are 90
Questions.
1.

The level of banks share of assets of all Australian financial institutions from the 1950s
onwards first _______, then in the 1980s _______, and recently has _______due to
securitisation of banks assets.
A: increased; decreased; increased
B: increased; decreased; remained stable
C*: decreased; increased; decreased
D: decreased; increased; remained stable

2.

Banks have gradually moved to liability management in the management of their balance
sheets. Which statement best describes liability management?
A: The loan portfolio is tailored to match the available deposit base.
B*: The deposit base is managed in order to fund loan and other commitments.
C: The ratio of debt to equity is managed to meet capital adequacy requirements.
D: The liability to assets ratio is maintained within Reserve Bank standards.

3.

All of the following financial securities are uses of funds by the banks EXCEPT:
A: commercial bills
B: credit cards
C*: certificates of deposit
D: overdrafts.

4.

The financial institution that is called a money market corporation and classified under the
Financial Corporations Act 1974 but not able to use the word bank in its business name is:
A: a credit union
B: a finance company
C: a building society
D*: an investment bank.

5.

The main difference between project finance and other forms of lending is:
A*: lenders base their participation on expected future cash flows and assets of the project
B: lenders take a major equity stake in the project
C: the project company that is set up as a separate legal entity relies heavily on venture
capitalists for equity funding as those participating expect
D: the lenders have a claim on the assets of the project as well as the sponsors.
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6.

All of the following statements are correct for describing features of securitisation EXCEPT?
A: existing financial assets are pooled and sold into a special purpose vehicle
B: new financial assets are issued, backed by assets held by a trustee
C*: funds raised from the new issue generate income to repay interest and principal
D: a credit enhancer may be used to improve the marketability of the issue.

7.

Superannuation funds that aim at delivering a longer term income stream and capital
appreciation by acquiring a diversified asset portfolio across a wider risk spectrum are classified
as:
A: managed growth funds
B: capital guaranteed funds
C*: balanced growth funds
D: capital stable funds.

8.

Which of the following forms of business organisation is characterised by limited liability?

A: sole partnership
B: partnership
C: a general partnership
D*: a company

9.

All of the following are advantages of a corporation EXCEPT:

A: freely transferable ownership
B: limited liability
C: access to capital markets
D*: low management costs.

10. A primary aim of corporate management should be to:

A: maximise the companys profit
B: maximise the number of shareholders
C*: maximise the shareholders wealth
D: minimise the companys costs.

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11. The key aspect of the agency relationship for the corporate form of business is that:
A: the firms owners will always act in the best interests of the managers
B: the managers will always act in the best interests of the firms owners
C: with their management contracts the managers have the incentive to act in the best
interests of the shareholders
D*: the managers have different incentives from the shareholders.
12. All of the following is true of share markets EXCEPT:
A: they help carry out direct financing
B: most of the trading takes place in already issued shares
C: the dollar volume of trading in the bond markets is greater than the dollar volume trading
in share markets
D*: every time a companys share is bought or sold, the company receives a payment.
13. Secondary markets:
A: can provide liquidity but do not raise new funds
B: make capital raising in the primary market more attractive
C: facilitate borrowers to raise long-term funds
D*: all of the above.
14. When a company decides to pay for an investment project by a short-term bank loan, this is best
described as:
A: a capital market decision
B: a money market decision
C*: a financing decision
D: an investment decision.
15. An increase in a firms level of debt will:
A: reduce the business risk of the firm
B*: increase the variability in earnings per share
C: lower the expected return on shareholders funds
D: increase the return to the debt holders

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16. A company may seek to raise further funds by issuing additional ordinary shares. The terms and
conditions of the new share issue are determined by the board of directors, in consultation with
its financial advisers and others, and having regard to the preferences of existing shareholders
and the needs of the company. Which of the following is LEAST likely to be a determinant of
the price that is eventually struck?
A*: the discount to current market price that can be offered to shareholders
B: the companys cash requirements
C: the projected earnings flow from the new investments
D: the cost of alternative funding sources.
17. The claims of the equity holders on the assets of the firm have priority over:
A: the debt holders
B: the preferred shareholders
C: the unsecured debt holders
D*: no other holder.
18. A pro-rata share rights offer means that:
A: the offer must be made to all the stakeholders of a company
B: the offer must be made to bond holders and shareholders who get their offer in before a
cut-off date
C*: the offer must be made to shareholders on the basis of number of shares already
held
D: the offer is made only to the shareholders with the largest number of shares on the share
register at a cut-off date.
19. Shares purchased cum-rights means:
A: the purchaser of the share cannot usually sell the right separately
B*: the purchaser of the share may take part in the rights offer
C: the purchaser of the share cannot take part in the rights offer
D: the purchaser of the share can take up the offer of the right without having to pay extra for
the subscription price.
20. Holders of _________ preference shares are entitled to dividend payments beyond the stated
dividend rate.
A*: participating
B: cumulative
C: noncumulative
D: secured

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21. The buyer of a convertible security accepts a lower rate of interest:

A: due to a lower default risk
B: because of the possibility that the company may recall the security
C: due to the accessibility of funds
D*: because of the possibility of becoming a shareholder in the future.
22. Dividend reinvestment schemes are a significant source of equity for many Australian
companies. Which of the following advantages of dividend reinvestment schemes may, at times,
also be regarded as a disadvantage?
A: The shareholder avoids transaction costs on the share issue.
B: The share issue price is usually at a discount to the average market price.
C*: Such schemes allow dividends to be paid while retaining cash for future growth.
D: The company is able to pass on franking credit to its shareholders.
23. In modern portfolio theory, an investor should not be concerned with unsystematic risk when
calculating expected rates of return, as:
A: there is no way to measure unsystematic risk
B*: unsystematic risks are assumed to be removed by diversification
C: unsystematic risks are generally insignificant
D: beta includes a portion to compensate for unsystematic risk.
24. When a share goes ex-rights, assuming everything else remains the same, its price should:
A: increase, as the company no longer has the right to make the shareholder convert
B*: decrease, as the shareholder is losing an option
C: remain the same, as the market knows about it in advance
D: increase, as a successful rights issue will raise a large amount of cash.
25. A company declares a dividend of 35 cents per share which was payable on the 14 September.
Immediately prior to the declaration of the dividend, the share price was $4.79. At close of
trading on the stock exchange on 13 September the share price was $5.44. What is the
theoretical ex-dividend price of the share?
A: $4.44
B: $4.79
C*: $5.09
D: $5.79

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26. A rights issue differs from a bonus issue of shares in that:

A: with a bonus issue there is greater number of shares in existence, unlike rights
B: shares that are cum-bonus are renounceable
C*: the purpose of a bonus issue for a company is not to raise more funding
D: only listed companies have rights issues.
27. If a company offers a onefor-five bonus issue and the current share price cum-bonus is $7.50,
then the theoretical value of each share ex-bonus is:
A: $7.50
B*: $6.25
C: $6.00
D: $5.00
28. A company whose share is selling for $24 announces a stock split of four-for-three. Which of
the following statements is correct?
A: There will be four times as many shares on issue and they will sell for $96.
B: There will be three times as many shares on issue, and they will sell for $8.
C*: There will be one-third more shares on issue and they will sell for $18.
D: There will be three quarters more shares on issue and they will sell for $32.
29. The current market price of a stock is $3.00. The rights issue is one-for-ten, priced at $2.80.
Calculate the theoretical ex-rights price.
A: $1.96
B: $2.85
C*: $2.98
D: $3.05
30. The following table is an order book for one stock at some point in time. If a person went into
the market and tried to buy 100 shares he would get the shares for:
Bid Amount
1000
2000
1000
100
A:
B:
C*:
D:

Bid
3.50
3.40
3.30
3.30

Ask
4.00
4.05
4.20
4.25

Ask Amount
2000
1000
500
100

4.25
3.30
4.00
3.50

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31. The _______ is the party that lends the funds in a commercial bill transaction.
A: acceptor
B*: discounter
C: drawer
D: endorser
32. In relation to a commercial bill, the acceptance fee is:
A: the discounters fee for taking on the risks associated with discounting the bill
B: the fee for drawing up the bill
C*: the fee for taking the liability for paying the holder at maturity
D: the drawers fee for taking on the risks associated with drawing the bill.
33. When a party endorses a bank bill, it:
A: repays the face value of the bill to the holder at maturity
B*: creates a liability for payment of the bill
C: provides the funds to the seller
D: provides the funds to the discounter of the bill.
34. A company issues a 90-day bill with a face value of $100 000, yielding 7.65% per annum. What
amount would the company raise on the issue?
A: $84 130.46
B: $92 350.21
C: $98 123.39
D*: $98 148.62
35. A holder of a 180-day bill with 60 days left to maturity and a face value of $100 000 chooses to
sell it into the market. If 60-day bills are currently yielding 6.8% per annum, what price will be
obtained?
A: $81 728.61
B: $89 945.79
C: $97 813.27
D*: $98 894.55

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36. Promissory notes have a decided advantage over bills in that:

A: they are liquid
B*: an issuer of a promissory note does not incur a contingent liability
C: a borrower without a strong name in the markets does not need bank endorsement
D: sole liability to repay the face value at maturity belongs to the underwriting bank(s).
37. A debenture is:
A: an unsecured bond that only best-name corporate borrowers can issue
B: a legal document stating the restrictive covenants on the loan
C*: a secured bond that is secured by a charge over the assets of the issuer
D: a corporate bond that has a credit enhancement.
38. A company issues a long-term debt security with specified interest payments and fixed charges
over unpledged assets. What type of security has been issued?
A: subordinated debt
B: unsecured notes
C: commercial mortgage
D*: debenture

39. Which one of the following statements about bonds is correct?

A: Most bonds pay interest annually.
B: The yield on a bond is generally a fixed rate.
C*: Bond prices vary inversely with interest rates.
D: Bond coupon rates vary with interest rates.
40. The market price of previously issued bonds is often different from face value as:
A: the coupon rate has altered
B: the maturity date has altered
C*: the market rate of interest has altered
D: previously issued bonds sell at a discount to new bonds.

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41. A $1 000 face value bond with coupon rate of 8% paid annually has five years to maturity. If
bonds of similar risk are currently earning 6%, what is the current price of the bond?
A: $920.15
B: $1 000
C*: $1 084.25
D: none of the above
42. All of the following features of a bond are fixed, EXCEPT:
A: coupon rate
B: face value
C*: price
D: interest payments.
43. If a bonds price is at a premium to face value, then it has:
A*: a yield below its coupon rate of interest
B: a yield equal to its coupon rate of interest
C: a yield above its coupon rate
D: a decreased risk premium.
44. A bank puts in a bid for $500 000 of 182 day Treasury notes at a yield of 5.8% per annum. What
price will the bank pay if the tender is successful?
A: $448 028.67
B: $485 756.54
C*: $485 946.17
D: $486 101.73
45. The term structure of interest rates:
A: reflects the differing tax treatment received by different securities
B*: represents the variation in yields for similar instruments differing in maturity
C: always results in an upward sloping yield curve
D: generally results in a downward sloping yield curve.

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46. Which of the following is not a hypothesis or theory used to explain the general shape of the
yield curve?
A: expectations hypothesis
B: liquidity premium hypothesis
C: market segmentation theory
D*: capital markets theory
47. In an economic period of high inflation, the yield curve would most likely be:
A*: upward-sloping
B: downward-sloping
C: flat
D: more curved.
48. Under the expectations theory, if market participants expect future short-term rates to be higher
than current short-term rates, the yield curve will:
A*: be upward sloping
B: be downward sloping
C: be flat
D: slope upward or downward or be flat, depending on risk and liquidity considerations.
49. If the yield curve is observed to be flat, then according to the liquidity premium theory, this
indicates that the market is predicting:
A: a small rise in short-term rates in the near future and a small decline further out in the
future
B: constant short-term interest rates in the near future, and further out in the future
C*: a small decline in short-term interest rates in the near future, continuing to decline slowly
further out in the future
D: constant short-term interest rates in the near future and a small decline further out in the
future.
50. Which of the following statements about segmented markets theory is correct?
A: It assumes that lenders always lend for short periods.
B*: It assumes that borrowers have particular periods for which they want to borrow.
C: It gives a good explanation of why yield curves usually slope upward.
D: It assumes that all bonds are perfect substitutes for each other.

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51. Most of the foreign exchange transactions are conducted:

A: by governments
B: by tourists
C*: in the over-the-counter market
D: on the Australian Stock Exchange.

52. If the value of a currency is influenced by a central bank that intervenes from time to time in the
foreign exchange market, this is regarded as a:
A: partial float
B: clean float
C*: dirty float
D: soft float.
53. If the Australian central bank wished to cause the AUD to appreciate, it would _______ AUD
and _______ the foreign currency.
A*: buy; sell
B: sell; sell
C: sell; buy
D: buy; buy
54. Foreign exchange dealers quote _________ at which they are prepared to deal in foreign
currency.
A: ask prices
B*: two-way prices
C: bid prices
D: margin prices
55. In general, multi-million dollar transactions _______ the foreign exchange dealers bid-offer
spread.
A: have no impact on
B: increase
C: widen
D*: narrow

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56. Calculate the current exchange rate EUR/JPY, given the two quotes:
USD/EUR 0.9780-90
USD/JPY 119.20-30
A: EUR/JPY 116.57-79
B: EUR/JPY 116.67-70
C: EUR/JPY 121.86-88
D*: EUR/JPY 121.76-98
57. Calculate the current exchange rate GBP/JPY, given the two quotes:
USD/JPY 114.20-30
GBP/USD 1.6750-60
A: GBP/JPY 190.71-88
B*: GBP/JPY 191.29-57
C: GBP/JPY 191.40-45
D: GBP/JPY 192.07-24
58. A forward transaction refers to:
A: the spot rate
B: the exchange rate that is determined at a specified date beyond the spot rate
C*: the exchange rate that is specified now but with delivery and payment at some
predetermined future date
D: the upper limit of a currency bid-ask spread.
59. An indirect exchange rate can be converted to a direct exchange rate by:
A: dividing the indirect rate by 100
B: multiplying the indirect rate by the spot rate
C: dividing the indirect rate by the number of US dollars required to purchase one unit of the
terms currency
D*: transposing the indirect rate.

60. Which of the following statements is correct?

A: Most of the futures contracts result in delivery.
B*: Only a small percentage of financial future contracts results in actual delivery.
C: Only a quarter of financial future contracts results in actual delivery.
D: Financial futures contracts never result in actual delivery.

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61. All of the following statements relating to the use of futures contracts are correct, EXCEPT:
A: futures contracts are derivative products that derive from a physical market product
B: the pricing of futures contracts is based on the price of the underlying market product
C: future physical market price changes are offset by a profit or loss in the futures market
D*: futures contracts are usually closed out by delivery of the physical market product.
62. The seller of a futures contract:
A: takes the long position
B*: has the obligation to deliver the underlying financial asset at the specified future date
C: has the obligation to receive the underlying financial asset at the specified future date
D: may, at their choice, deliver or receive the underlying financial assets at the specified
future date.
63. A futures trader who has a _______ position in oil futures wants the price of oil to _______ in
the future.
A*: long; increase
B: long; fall
C: short; stay the same
D: short; rise
64. If an investor sells a three-year Commonwealth Treasury bond and on delivery date the interest
rate of Treasury bonds is higher than they expected, they will have:
A: gained money on their long position
B: lost money on their long position
C*: lost money on their short position
D: gained money on their short position.
65. If a futures contract is marked-to-market, this refers to:
A: the interaction of the demand and supply forces in the market to determine the price of the
options contract
B: the interaction of the demand and supply forces in the market to determine the price of the
futures contract
C*: the settlement of gains and losses on futures contracts on a daily basis
D: the settlement of gains and losses on forward contracts on a daily basis.

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66. You hold a long oil futures contract that expires in June. To close out your position in oil futures
before the delivery date, you must:
A: buy one June oil futures contract
B: buy two June oil futures contract
C*: sell one June oil futures contract
D: sell one July oil futures contract.
67. Speculators are mainly interested in:
A*: attempting to make a profit by betting on expected price changes
B: reducing their exposure to risk of price changes
C: increasing market liquidity
D: reducing the spread between the bid and ask prices on bonds.
68. Arbitrageurs are mainly interested in:
A: reducing their exposure to risk of price changes
B*: attempting to make a profit by taking advantage of price differentials between different
markets
C: increasing market liquidity
D: reducing the spread between the bid and ask prices on bonds.
69. Which one of the following statements about the existence of speculators in future markets is
correct?
A: Their main aim is to reduce their exposure to risk.
B: They make it difficult for hedgers to find someone to take the opposite position.
C*: They aid hedgers by adding to the liquidity in the markets.
D: Once a trader is known as a speculator they are no longer allowed to participate in the
markets.
70. A funds manager manages a diversified Australian share portfolio, but is concerned that stock
prices in the market will fall over the next three months. The manager decides to hedge the risk
by selling 100 S&P/ASX All Ordinaries Share Price Index futures contracts at 23.55. Three
months later, when the manager closes out the position, the contract is trading at 24.10.
Calculate the profit or loss position of the futures transactions.
A: $5 500 loss
B: $24 100 profit
C*: $137 500 loss
D: $550 000 profit

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71. In comparing forwards and futures, futures are typically:

A: riskier than forwards
B: more liquid than forwards
C: traded on an organised exchange
D*: all of the above.
72. An American call option lets the buyer:
A: buy the underlying asset at the exercise price on or before the expiration date
B: sell the option in the open market prior to expiration
C: sell the underlying asset at the exercise price on or before the expiration date.
D*: A and B only
73. A European call option can be exercised:
A*: only on the expiration date
B: at any time up to the expiration date
C: if the price of the underlying asset falls below the exercise price
D: immediately after the payment of dividends.

74. The price specified in the option contracts for calls and puts is called:
A: the market price
B: the option price
C*: the strike price
D: the expected value.
75. A ________ option is an option to purchase a specified number of shares on or before some
future date at a specified price, whereas a _______ option is an option to sell a specified number
of shares on or before some future date at a specified price. ______ are bought if the share is
expected to rise.
A: put; call; puts
B: call; put; puts
C*: call; put; calls
D: put; call; calls

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76. The maximum loss a buyer of a share call option can undergo is equal to:
A: the share price minus the value of the call
B: the strike price minus the share price
C*: the call premium
D: the share price.
77. Which of the following statements best reflects the profit profile of an option contract?
profit
1.00

break-even
premium
12.00

11.00

market price

loss
exercise price

A*: The profile depicts the short call position of the option seller.
B: The profile depicts the long call position of the buyer of the option.
C: The profile depicts the short put position of the option seller.
D: The profile depicts the long put position of the buyer of the option.
78. Buyers of put options expect the value of the underlying asset to _______, and the sellers of call
options expect the value of the underlying asset to:
A: increase; increase
B: decrease; increase
C: increase; decrease
D*: decrease; decrease
79. A put option is said to be in-the-money if:
A: the exercise price is less than the share price
B*: the exercise price is greater than the share price
C: the exercise price is equal to the share price
D: the price of the put is higher than the price of the call.
80. An investor holds long call options that may be exercised at any time over the next month. The
spot price of the underlying asset is $12.75; the strike price of the option is $15.10; and the
premium paid was $2.35. What is the value of the option to the holder?
A*: -$2.35
B: zero
C: $10.40
D: $15.10

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81. Which of the following best reflects the exposure position of a writer of a put option?
A: A loss is made when the spot price is below the exercise price adjusted by the premium.
B: The extent of the loss potential is limited to a zero spot price less the premium paid.
C: The maximum profit to the writer is limited to the extent of the premium paid.
D*: All of the above
82. Suppose that Maxima shares are selling for $10 per share and you own a call option to buy
Maxima shares at $7.50. The intrinsic value of your option is:
A: $10.00
B: $7.50
C*: $2.50
D: not able to be determined without further information.
83. Which of the following factors would tend to increase the size of the premium on an options
contract?
A: The current short-term interest rates are high.
B: The option is near its expiration date.
C: The price volatility of the underlying asset is low.
D*: The option is far off its expiration date.
84. A lender, concerned that its cost of funds might rise during the term of the loan it has made, can
hedge this rise without foregoing the chance to profit by a decline in the cost of funds, by:
A: selling futures contracts on Treasury bills
B: buying futures contracts on Treasury bills
C: buying call options on Treasury bills
D*: buying put options on Treasury bills.
85. The decision between selecting a future or an option:
A*: reflects a trade-off between the higher cost of using options and the extra insurance
benefits that options provide
B: reflects the greater risk from using options and the extra insurance benefits that options
provide
C: reflects a trade-off between the higher cost of using futures and the extra insurance
benefits that futures provide
D: depends on whether the underlying instrument is an equity or debt instrument.

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86. A wool farmer in NSW is concerned about the fluctuation of wool prices. He can hedge this
risk by:
A: selling a call
B*: buying a put
C: selling a put
D: buying a call.
87. In the 1930s academics did an experiment to test whether share prices were predictable. They
tested several investors and measured the performance of each. The winner was:
A: a group of NYSE traders.
B: A monkey
C:* Darts thrown at the Wall Street Journal
D: Academics.
88. When Myron Scholes and Fisher Black developed the option pricing model, the last unknown
element they had to quantify was:
A:* Risk.
B: Share Price
C: Interest Rate
D: Maturity.
89. What other academic field was drawn on to develop the Black Scholes Option Pricing Model:
A: Anthropology.
B:* Rocket Science
C: Biometrics
D: Accounting.
90. Long Term Capital Management:
A: Was a hedge fund.
B: Was run by academics
C: Invested in options
D:* All of the above.

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