Deck 3: Introduction to the Flow of Funds

Question 1

Exchanges organise trading between dealers.

Answer 1

False

Question 2

AFMA determines the market rules and conventions in Australia's financial markets.

Answer 2

False

Question 3

In the financial markets, surplus and deficit units deal directly with each other without any assistance from financial institutions.

Answer 3

False

Question 4

Deficit units value liquidity and so have a preference for short and/or flexible financial contracts.

Question 5

Under a 'best efforts' contract an investment bank handles the issue of securities but does not guarantee that they will all be sold.

Question 6

'Underwriting' refers to the process of arranging the issue of financial securities.

Question 7

'Trading' in the financial markets is the process through which a buyer and seller agree to the terms of the trade.

Question 8

Fund managers usually 'intermediate' the supply of funds to deficit units in direct financing.

Question 9

Ratings agencies are paid by investors who are interested in the credit quality of particular securities.

Question 10

Ratings agencies have an unblemished reputation for providing reliable ratings.

Question 11

It is the issuer's responsibility to keep a record of the owners of its debt securities and changes thereof.

Question 12

ASIC requires that issuers always provide relevant and reliable information in order to overcome information asymmetry.

Question 13

Automated trading systems have replaced face-to-face trading with screen-based trading in exchange-organised markets.

Question 14

The issue of debt securities generally requires them to be rated by a recognised ratings agency.

Question 15

An order to purchase 1000 NAB shares for not more than $40 each is an example of a limit order.

Question 16

The Australian Securities Exchange regulates the issue of new securities.

Question 17

The primary market is the set of arrangements for the issuing of securities.

Question 18

The expression 'order-driven market' refers to the bids and offers of dealers.

Question 19

A standby underwriting agreement commits the issuing bank to acquire any unsold securities.

Question 20

'Pooling' of funds is required because of the size-mismatch in the amount of funds supplied by surplus units and that demanded by deficit units.

Question 21

Liquid markets perform the price discovery function more reliably than illiquid markets.

Question 22

Price resilience refers to the ability of a market to handle normal-sized trades without disrupting prices.

Question 23

The efficiency of direct financing depends largely on the performance of secondary markets.

Question 24

Maturity transformation is achieved by a liquid secondary market.

Question 25

A market's liquidity is indicated by its daily turnover, its trading hours and its degree of automation.

Question 26

Strong-form market efficiency implies that security prices are always fair.

Question 27

In the OTC markets the expression 'market spread' refers to the difference between a dealer's bid and offer quotes.

Question 28

Under the weak-form of the EMH, the study of past price patterns can be effective in enabling investors to generate abnormal profits.

Question 29

An important feature of over-the-counter markets is their transparency.

Question 30

Automated trading systems mean that investors no longer require a broker in order to trade shares.

Question 31

Wide bid-ask spreads enhance market liquidity because they reward dealers.

Question 32

Liquid markets allow investors to follow the value of their holdings during the market's trading hours.

Question 33

The bid-ask spread within a market is an indicator of the liquidity within that market.

Question 34

Liquid secondary markets reduce the cost of funds.

Question 35

Dealers in the financial markets are required to provide bid and offer quotes when called by another dealer.

Question 36

Trading can be seen as a process that discovers the value of the traded item.

Question 37

The expression 'quote-driven markets' refers to the practice of deals being based on the quotes provided by dealers.

Question 38

A dealer's position is not exposed to price risk because dealers set their own bid and offer quotes and can therefore ensure each trade is profitable.

Question 39

Financial markets are major users of financial information.

Question 40

Securities with relatively high levels of price resiliency have prices that are highly sensitive to buying or selling pressure.

Question 41

Bull and bear markets appear to be driven (at least partially)by investor sentiment.

Question 42

The credit ratings provided by ratings agencies:

A)play a role in overcoming information asymmetry in the financial markets
B)are an informed opinion on the credit standing of a debt issue
C)are paid for by the security's issuer
D)were found to be unreliable (in relation to mortgage-related securities)during the GFC.
E)All of these.

Question 43

The 'greater fool' theory of investing is an approach taken by fundamental analysts who are looking for under- and over-valued assets.

Question 44

When issuing securities, deficit units will seek assistance from:

A)investment banks
B)retail investors
C)institutional investors
D)financial analysts
E)brokers.

Question 45

Which of the following is NOT a feature of secondary markets?

A)A trading platform (such as a computer program)that enables trading.
B)Trading rules and procedures.
C)A centralised trading room.
D)Settlement procedures.
E)Standardised securities.

Question 46

A 'bear market' describes periods where the value of shares rise strongly.

Question 47

Brokers:

A)earn a spread by buying securities at a low price and selling them at a higher price
B)operate in over-the-counter markets
C)charge a commission on the trades they perform
D)can be described as 'market makers'.
E)All of these.

Question 48

Volatility is a source of risk and thus creates the need for risk-management instruments.

Question 49

In reference to the flow-of-funds, deficit units generally prefer:

A)a high cost of funds
B)low risk
C)large amounts
D)flexible and short contracts.
E)All of these.

Question 50

Most funds are supplied to the primary markets through:

A)investment banks
B)retail investors
C)fund managers
D)financial analysts
E)brokers.

Question 51

The ASIC Act requires ASIC to:

A)uphold the law uniformly, effectively and quickly
B)promote confident and informed participation by investors and consumers in the financial system
C)make information about companies available to the public
D)improve the performance of the financial system and entities within it.
E)All of these.

Question 52

The phenomenon of price bubbles is relatively recent.

Question 53

Price bubbles should not occur in efficient markets because they reflect prices that do not represent fair value.

Question 54

The role of the primary market is to:

A)provide investors with liquidity
B)discover the price of securities
C)raise funds for issuers
D)reflect general price movements through benchmark indices.
E)All of these.

Question 55

Which of the following is NOT true about the underwriting services provided by investment banks?

A)The most common approach to issuing securities in Australia is on a 'best efforts' basis.
B)Share issues require the preparation of a prospectus.
C)In addition to the best efforts contract, issuers can also enter into a standby underwriting agreement.
D)Under the best efforts method, the underwriter will acquire all unsold securities.
E)Investment bank fees for underwriting services are usually in the form of a commission.

Question 56

There is little evidence of anomalies to contradict the efficient market hypothesis (EMH).

Question 57

Volatility refers to the size of the movements in a variable.

Question 58

Investments that display more volatility have less potential for higher returns.

Question 59

Price movements are random when they are equally likely to rise as to fall.

Question 60

A market's clearinghouse:

A)issues certificates representing securities to investors
B)keeps an electronic record of securities and their owners
C)is only involved in primary market trades
D)provides an expert opinion about the expected performance of securities.
E)All of these.

Question 61

Dealers:

A)match buy and sell orders on behalf of their clients
B)hold an inventory of securities
C)earn their main income from dividends received on the shares they hold
D)charge a commission on trades performed.
E)All of these.

Question 62

Which of the following best describes a price 'bubble'?

A)Abnormal returns that are not explained by EMH.
B)The movement over time in a security's price where an increase is equally likely to be followed by a fall as a further increase.
C)Periods where share prices fall because of pessimistic sentiment.
D)Periods where share prices rise because of optimistic sentiment.
E)Periods where prices rise as a result of excessive optimism that are followed by a sharp correction.

Question 63

Which of the following is consistent with (or explained by)the EMH?

A)Price bubbles.
B)Random price movements.
C)Bull and Bear markets.
D)Excess returns earned through superior knowledge or skill.
E)Anomalies, relating to firm size and time-patterns.

Question 64

How do the preferences of surplus and deficit units generally differ?

Question 65

A dealer provides you with a bid quote of 0.9420 and an offer quote of 0.9430.This means that:

A)you can buy at 0.9420
B)you can sell at 0.9430
C)the market spread is 0.0010.
D)All of these.
E)None of these.

Question 66

Volatility:

A)is the degree of variability in security prices
B)if excessive, can contribute to market liquidity
C)arises primarily from bid-offer bounce
D)can encourage risk-averse traders
E)All of these.

Question 67

A dealer who wishes to reduce their holding of a particular security will set (when compared to other dealers):

A)a higher bid price
B)a lower bid price
C)a higher offer price
D)a lower offer price
E)a lower commission rate.

Question 68

Which of the following statements is TRUE if the efficient market hypothesis holds?

A)It implies perfect forecasting ability.
B)It implies that the market is irrational.
C)It implies that prices do not fluctuate.
D)It implies that prices reflect all available information.
E)It implies that tomorrow's price will be the same as today's price.

Question 69

The liquidity of secondary markets is NOT demonstrated by:

A)the daily turnover
B)the sale of securities by issuers at an acceptable price
C)the size of the bid-ask spread
D)the degree of price resilience.
E)Any of these.

Question 70

Active secondary markets do NOT:

A)provide investors with liquidity
B)raise funds for the issuers of securities
C)perform price discovery
D)perform maturity transformation
E)assist the operation of primary markets.

Question 71

The intention to sell 5000 AMP shares at not less than $5.20 each would be best achieved by:

A)a limit order
B)an at-market sell order
C)a dealer's bid price
D)a dealer's offer price
E)short selling.

Question 72

What are the main costs involved for surplus and deficit units with direct financing?

Question 73

'Transparency' is an important feature of exchange-organised markets.It means:

A)buyers and seller know who they are trading with
B)trading takes place in a centralised trading room
C)real-time accurate information is available about a market's trading
D)markets provide transactional immediacy.
E)None of these.

Question 74

Identify the institutions that assist deficit and surplus units to arrange direct financing and briefly describe their activities.

Question 75

If financial markets are efficient, then:

A)there is reason to believe that prices are too high or too low
B)it is possible to profit regularly from analysing publicly available information
C)prices will adjust quickly to correctly reflect new information
D)there will be periods where expectations are too bullish and too bearish
E)historical price trends will give you a good idea of where prices are headed in the near future.

Question 76

In the OTC markets trading rules and conventions are established by:

A)AFMA
B)ASIC
C)The ASX
D)The RBA
E)The ATO.

Question 77

Who does the ASX make responsible for each share market trade?

A)Brokers.
B)The broker's clients who are trading.
C)Dealers.
D)The clearinghouse.
E)ASIC.

Question 78

The over-the-counter markets:

A)are also known as quote-driven markets
B)have dealers who provide transactional immediacy
C)have dealers who act as market markers
D)have dealers who act as principals because they trade on their own behalf and hold a position.
E)All of these.

Question 79

The process of revaluing securities on the basis of their current market value is known as:

A)marking-to-market
B)pricing-to-market
C)valuing-to-market
D)revaluing-to-market
E)calculating-to-market.

Question 80

The price discovery function of markets is useful:

A)to investors, to help them monitor the value of their investments
B)to potential issuers of securities because it informs them of the proceeds they can expect to receive
C)in revealing the general movement in market values through indices.
D)All of these.
E)None of these.