Question 1

Exchanges organise trading between dealers.

Accepted Answer

Exchanges organize trading between buyers and sellers, not specifically between dealers. They provide a platform for various market participants to trade securities.

Question 2

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

Accepted Answer

AFMA (Australian Financial Markets Association) is an industry body that represents participants in Australia's financial markets, but it does not determine the market rules and conventions. The Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) play more significant roles in regulating and overseeing Australia's financial markets.

Question 3

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

Accepted Answer

Surplus and deficit units may deal directly with each other, but they often require the involvement of financial institutions such as banks, brokerage firms, or investment funds to facilitate transactions and provide services such as advice, risk management, and liquidity.

Question 4

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

Accepted Answer

The answer of Deficit units value liquidity and so have...

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.

Accepted Answer

This is the definition of a best efforts contract. The investment bank is responsible for trying their best to sell the securities, but there is no guarantee that they will all be sold.

Question 6

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

Accepted Answer

This is the correct definition of underwriting.

Question 7

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

Accepted Answer

Trading involves the process of a buyer and seller coming to an agreement on the terms of a transaction in the financial markets.

Question 8

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

Accepted Answer

Fund managers typically operate in indirect financing, where they collect funds from savers and then allocate these funds to borrowers or deficit units, rather than facilitating direct transactions between savers and borrowers.

Question 9

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

Accepted Answer

Ratings agencies are paid by the issuers of securities being rated, not by investors. This has led to concerns about conflicts of interest, as ratings agencies may feel pressure to assign higher ratings to securities in order to maintain a good relationship with the issuers who pay them.

Question 10

Ratings agencies have an unblemished reputation for providing reliable ratings.

Accepted Answer

Ratings agencies have come under scrutiny in recent times for their role in the 2008 financial crisis and for potential conflicts of interest. Their reputation for providing reliable ratings has been questioned.

Question 11

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

Accepted Answer

It is typically the responsibility of a trustee or a registrar, not the issuer, to keep a record of the owners of its debt securities and any changes thereof. The issuer usually outsources this task to ensure accuracy and compliance with regulations.

Question 12

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

Accepted Answer

The answer of ASIC requires that issuers always provide relevant...

Question 13

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

Accepted Answer

Automated trading systems have indeed replaced face-to-face trading and screen-based trading is now prevalent in exchange-organised markets.

Question 14

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

Accepted Answer

This statement is true. Debt securities, such as bonds or debentures, are typically rated by recognised ratings agencies, such as Moody's or Standard & Poor's, to provide investors with an assessment of the creditworthiness and repayment risk associated with the issuer of the security.

Question 15

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

Accepted Answer

A limit order is an order to buy or sell a security at a specified price or better. In this case, the limit is set at $40 per share, meaning that the buyer is not willing to pay more than this amount for each share.

Question 16

The Australian Securities Exchange regulates the issue of new securities.

Accepted Answer

The Australian Securities Exchange (ASX) is a market operator and does not regulate the issue of new securities; this is the role of the Australian Securities and Investments Commission (ASIC).

Question 17

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

Accepted Answer

The primary market is the market where new securities are issued to the public. It involves the arrangement for the sale of securities by the issuer, typically through an underwriter or investment bank.

Question 18

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

Accepted Answer

An order-driven market is a market where orders from buyers and sellers are matched by an electronic trading system or exchange, without the need for dealers. The bids and offers are submitted by traders, and the matching process is automated based on specific rules and protocols.

Question 19

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

Accepted Answer

A standby underwriting agreement is a type of agreement in which the underwriter agrees to purchase any unsold securities in the event they are not purchased by investors. This commitment by the underwriting bank helps to ensure that the offering will be fully subscribed, providing assurance to the issuer that its securities will be sold, and helping to mitigate the risk of a failed offering.

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.

Accepted Answer

Pooling of funds is required in order to match the smaller amounts of funds supplied by surplus units with the larger amounts demanded by deficit units. This helps to ensure that all parties have access to the funds they need to meet their financial objectives.

Quiz 3: Introduction to the Flow of Funds