Financial Institutions, Instruments and Markets 9th Edition by Christopher Viney Test bank

Section: 1.03 Financial instruments
Topic: Financial instruments


 
108. 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.
Ans: False
Feedback: Short selling is the sale of a financial product that the seller does not own.
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 1.02 Explain the functions of a modern financial system and categorise the main types of financial institutions, including depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
Section: Introduction
Topic: Introduction


 
109. Explain the advantages of financial intermediation. 
Ans:
In carrying out the role of offering instruments with varying financial attributes (risk, return, liquidity, timing of cash flows), intermediaries perform a range of functions that are important to both savers and borrowers.
These are:
asset transformation
maturity transformation
credit risk diversification and transformation
liquidity transformation
economies of scale.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: 2-3 minutes
Learning Objective: 1.02 Explain the functions of a modern financial system and categorise the main types of financial institutions, including depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
Section: 1.04 Financial markets
Topic: Financial markets


 
110. What is monetary policy and who is responsible for its implementation?
Ans: Monetary policy is the use of interest rates to control inflation, usually in a specified range, and to promote economic growth. A central bank is usually responsible for carrying out monetary policy.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 1.02 Explain the functions of a modern financial system and categorise the main types of financial institutions, including depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
Section: Introduction
Topic: Introduction


 
111. Explain what a debt security is. What are some common types of debt securities?
Ans: A debt security represents a contractual claim against the issuer of the instrument who has borrowed the funds. The borrower agrees to abide by the terms of the contract such as meeting covenants. A major part of the contract is the terms of payment to the lender. Corporations issue debt securities such as debentures, term loans, commercial bills, promissory notes and unsecured notes.
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 1.03 Define the main classes of financial instruments that are issued into the financial system, that is, equity, debt, hybrids and derivatives.
Section: 1.04 Financial markets
Topic: Financial markets


 
112. Identify and explain briefly the types of derivatives in a financial system.
Ans: There are four basic types of derivative contracts.
1. A futures contract is a contract to buy (or sell) a specified amount of a commodity or financial instrument at a price determined today for delivery or payment at a future specified date.
2. A forward contract has features similar to a futures contract but is generally more flexible as it is negotiated with a bank or investment bank.
3. An option gives the buyer the right but not the obligation to buy (or sell) a certain asset before or at a specified date at a predetermined price.
4. A swap contract is an arrangement to exchange specified future cash flows. With an interest rate swap, there is an exchange of future cash flows, such as one based on a floating interest rate and the other on a fixed interest rate on a notional principal.
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Hard
Est time: 1-3 minutes
Learning Objective: 1.03 Define the main classes of financial instruments that are issued into the financial system, that is, equity, debt, hybrids and derivatives.
Section: 1.03 Financial instruments
Topic: Financial instruments


 
113. The capital markets provide the opportunity for large corporations to manage their long-term cash flows. Discuss this statement using the example of a surplus entity and a deficit entity.
Ans: The debt part of capital markets consists of a range of instruments. Large creditworthy companies seeking funds can issue long-term securities such as bonds or unsecured notes directly into capital markets. Organisations such as superannuation funds or insurance companies with funds to invest can buy these instruments for part of their portfolio.