6.

According to the text, the principal source of income for investment banks is:
Chapter 03 - Test Bank
A. issuing bank bills.
B. off-balance-sheet business.
Multiple Choice Questions C. issuing secondary securities.
D. issuing certificates of deposit.
1. The financial institution that is a specialist provider of financial and advisory services to companies is a/an: 7. Money market corporations (merchant and investment banks) have significantly increased their off-
balance-sheet business on account of competition. All of the following are off-balance-sheet activities of
investment banks except:
A. credit union.
B. finance company.
C. building society. A. mergers and acquisitions.
D. investment bank. B. managing project finance undertakings.
C. trading in the short-term money market.
2. Money market corporations: D. strategic risk management advice.
8. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.
A. obtain all their funding by issuing bank bills.
B. are generally referred to as investment banks.
C. offer money market deposits to retail clients. A. investment broker
D. sell money market securities to retail clients. B. commercial banker
C. accounting firm
3. The task of the investment bank in a public issue of new shares is to: D. investment banker
9. The process of due diligence involves:
A. offer interim financing to the firm.
B. invest the funds raised in the capital markets.
C. provide advice in designing and pricing a share issue. A. underwriting of new equity issues by a company.
D. act as a trustee of the funds raised. B. providing advice to companies on the raising of new equity.
C. detailed analysis of a firm's financial statements.
4. Investment banks: D. placement of securities to institutional investors.

10. The detailed analysis of a firm's financial statements as part of a possible takeover is called:
A. are supervised by APRA, since they operate in the banking sector.
B. focus their activities in the bank bill sector and money market.
C. obtain their deposits only from large corporations. A. share analysis.
D. are not required to comply with minimum capital adequacy requirements like commercial banks are B. technical analysis.
required to. C. due diligence.
D. project management.
5. A company may hire a/an ________ to advise on and underwrite its new share issue.
11. Underwriting is when a/an:

A. loans officer
B. investment banker A. broker places new share issues with selected financial institutions.
C. share analyst B. investment bank gives advice to a company about a merger.
D. treasury officer C. broker or a financial institution guarantees prices on a security issue for a company.
D. investment bank finds funding for a company.
12. When an investment bank guarantees a certain price for a company issuing new shares, it is acting as a/an: 18. If a car manufacturer were to purchase one of the companies listed below, which purchase would be called
a vertical takeover?

A. auctioneer.
B. broker. A. An electronic components supplier
C. dealer. B. A rival car manufacturer
D. underwriter. C. A travel company
D. A finance company
13. When an investment bank helps a company sell large parcels of shares directly to institutional investors,
this is called: 19. A conglomerate takeover occurs when:

A. due diligence. A. companies from different business areas merge.

B. placement. B. both parties are similar in size.
C. securitisation. C. the merged entity is expected to have large additional value.
D. underwriting. D. the management team of the target company is combined with that of the takeover company.

14. The ________ is the company in a merger transaction that tries to merge with or acquire another company. 20. The following factors are all reasons for mergers except:

A. target company A. finances.

B. takeover company B. economies of scale.
C. conglomerate company C. business diversification.
D. hostile company D. reduction of debt.

15. Venture capital is: 21. The financial institution that pools funds for individuals and then invests them in both the money and
capital markets is a:

A. funding provided for a new start-up business by a group of investors.

B. providing advice to companies on the raising of new capital. A. savings bank.
C. short-term funding provided by banks. B. credit union.
D. placement of securities to institutional investors. C. investment bank.
D. managed fund.
16. The ________ is the company in a merger transaction that is being pursued as a takeover possibility.
22. Which of the following statements about managed funds is incorrect?

A. target company
B. takeover company A. The assets of large managed funds may be managed by several professional managers.
C. conglomerate company B. A mutual fund is required to use the services of a mutual fund custodian.
D. hostile company C. Sources of funds for a managed fund may be in the form of monthly payments.
D. For Australia, recent figures show that the statutory funds of life offices have the largest amounts of
17. If a car manufacturer were to purchase one of the companies listed below, which purchase would be called assets under management.
a horizontal takeover?
23. A managed fund that is established under a trust deed and is managed by a responsible entity is called a:

A. A steel mill
B. A rival car manufacturer A. mutual fund.
C. A tyre manufacturer B. trust fund.
D. A finance company C. trustee fund.
D. investment fund.
24. Superannuation funds that aim at delivering a longer term income stream and capital appreciation by 30. The largest proportion of funds held by cash management funds in Australia is in:
acquiring a diversified asset portfolio across a wider risk spectrum are classified as:

A. cash and deposits.

A. managed growth funds. B. bills of exchange.
B. capital guaranteed funds. C. promissory notes and CDs.
C. balanced growth funds. D. bills of exchange and CDs.
D. capital stable funds.
31. Which of the following statements is NOT a feature of unit trusts?
25. An investor who wishes to save for their retirement in 20 years' time and who has a high propensity for
taking risk is likely to invest in a managed fund which invests in government securities and:
A. Unit trusts are companies that accept funds from investors and make investments that yield returns in the
form of income and/or capital gains.
A. cash deposits. B. The market determines the value of a listed unit trust.
B. some property. C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any time.
C. debentures. D. The number of listed property trusts is far larger than the number of listed equity trusts.
D. foreign equities.
32. Since the early 1990s, public unit trusts have seen the largest growth in assets in:
26. Managed fund managers:

A. cash and deposits.

A. invest funds according to their fund's trust deed. B. long-term government securities.
B. generally reinvest income and any capital gains in the fund. C. equities and units in trusts.
C. will usually maintain a diversified portfolio of assets within the asset classes. D. land and buildings.
D. all of the given answers.
33. The majority of securities owned by unlisted public unit trusts are:
27. Funds under management by managed funds in 2010 have a value of:

A. real physical assets.

A. $345b. B. money market securities.
B. $500b. C. capital market securities.
C. $1000b. D. fixed interest trusts.
D. $1666b.
34. Which of the following statements is NOT a feature of public unit trusts?
28. A mutual investment fund that specialises in short-term debt instruments and managed by a financial
intermediary is called a:
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
A. money market fund. C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
B. cash management trust. D. Property trusts are generally unlisted as they need notice to sell their physical assets.
C. certificate of deposit fund.
D. bank bill fund. 35. An investor is considering different methods of investment, including a public unit trust. Which of the
following is NOT a function of a public unit trust?
29. The main feature of cash management trusts is:

A. Acting as a vehicle for the pooling of investor funds

A. they allow individuals to access the money markets. B. Providing a level of investor protection though the appointment of a trustee
B. they provide liquidity and access to funds. C. Allowing small investors access to larger investment opportunities
C. that many are associated with stockbrokers and the electronic purchasing and selling of securities by D. Locking in a trust unit price by listing on the Australian Securities Exchange
investors.
D. all of the given answers.
36. A developer is promoting a large new suburban shopping centre and decides to establish a publicly listed 42. Which of the following statements is true?
unit trust to attract investors. Which type of unit trust would likely be established?

A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown much slower
A. A mortgage trust than life insurance office funds.
B. A property trust B. Assets in defined benefit schemes have experienced greater growth than assets in accumulation schemes.
C. An equity trust C. The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid growth
D. A cash management trust in Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten members that
37. The main advantage of a listed trust over an unlisted unit trust is that a listed trust: provide benefits for employees working in the same industry.

43. Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term
A. has a trustee but an unlisted trust does not. assets.
B. can be sold at any time by the unit holder in the marketplace.
C. invests in equities, while an unlisted trust invests only in fixed interest.
D. invests in equities, while an unlisted trust invests in property. A. long, long
B. long, short
38. In Australia, listed property trusts dominate over the proportion of unlisted property unit trusts because: C. short, long
D. short, short
A. the valuations of buildings are larger than share valuations. 44. A private superannuation fund to which an individual makes recurring, predetermined payments for a given
B. mortgages on buildings are larger than companies' valuations. number of years into the plan is called a/an:
C. listed shares can be more advantageous in terms of liquidity.
D. it reflects the liquid nature of properties.
A. approved deposit scheme.
39. The function of a ________ is to provide income for employees of corporations or governments after they B. superannuation savings plan.
retire. C. standard superannuation scheme.
D. single premium scheme.
A. building society 45. If an individual retires early but wants to retain their superannuation entitlements in a favourable taxation
B. credit union environment, they can hold their eligible superannuation funds in a:
C. general insurer
D. superannuation fund
A. single-premium scheme.
40. Essentially, superannuation assets provide: B. growing annuity scheme.
C. rollover scheme.
D. termination scheme.
A. indefinite income when employees stop working.
B. indefinite income as long as employees continue to work. 46. A defined benefit plan:
C. limited income if an employee is injured and unable to work.
D. retirement income for employees.
A. is always fully funded, with no shortfall requirement.
41. Recent figures about superannuation assets in Australia show that the largest amounts of assets are in the B. may have a shortfall, but the Commonwealth government will make good the shortfall.
____: C. may have a shortfall, but the employer will make good the shortfall.
D. is where the employee bears the risk if the performance of the investment is bad.
A. corporate superannuation funds.
B. industry corporation funds.
C. retail superannuation funds.
D. self-managed superannuation funds.
47. In an accumulation superannuation fund: 52. All of the following Acts or Bills are relevant to the operation of the Australian superannuation industry
except the:

A. the employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed. A. Superannuation Industry (Supervision) Act 1993.
C. if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or B. Income Tax Assessment Act 1936.
institution. C. Superannuation (Agents and Brokers) Act 1984.
D. all of the earnings' taxes are paid by the employer. D. Superannuation Guarantee Amendment Bill 2011.

48. The superannuation fund that involves the amount of benefit paid out on retirement being calculated by a 53. Which of the following is NOT an important result of the compulsory guarantee charge implemented in
formula based at the time when a person joined the fund is called: July 1992?

A. a defined benefit fund. A. The amount of superannuation funds in Australia has increased significantly.
B. an accumulation fund. B. The employer contribution SGC increased to 9% from July 2002.
C. a defined termination fund. C. The vast majority of retirement savings are invested in superannuation funds.
D. a defined payout fund. D. The SGC represents a penalty taxation charge on employers.
49. The superannuation fund where the amount of funds available at retirement consists of past contributions 54. The amount of financial assets held by insurance companies has _______ over the past 20 years.
plus earnings less taxes and expenses is called:

A. decreased
A. a defined benefit fund. B. remained stable
B. an accumulation fund. C. increased slowly
C. a defined termination fund. D. increased dramatically
D. a defined payout fund.
55. Recent figures show the largest proportion of assets held by life insurance companies is:
50. The superannuation fund where the employer must make good a shortfall in the fund when the benefit is to
be paid up is a/an:
A. Commonwealth securities.
B. loans and placements.
A. accumulation fund. C. equities and units in trusts.
B. defined benefit fund. D. land and buildings.
C. fully funded fund.
D. private fund. 56. In Australia, the prudential supervisor of life insurance offices is:

51. When an employee makes regular contributions equal to 7% of their salary and their employer also
contributes the equivalent of 14% of salary to a superannuation fund that is an accumulation scheme: A. ASIC.
B. APRA.
C. the Reserve Bank of Australia.
A. the final payout benefit is stated when the member joins the fund. D. PSLI.
B. the final payout depends upon the investment performance of the fund.
C. payment is specified under the superannuation guarantee legislation.
D. the benefit is paid in the form of a life annuity.
57. Which of the following statements with regard to life insurance companies is true? 62. Life insurance companies attract a large proportion of their funds through regular premiums from policy
holders. In regard to the matching principle, what types of assets would an insurance company hold the
smallest proportions of?
A. Life insurance companies are more likely to acquire short-term assets than long-term securities, for
liquidity reasons.
B. Life insurance companies are more likely to acquire long-term assets because their liabilities are long- A. Equity investments
term in nature. B. Debentures and notes
C. Life insurance companies tend to acquire short-term assets because they have relatively predictable C. Housing loan mortgages
inflows and outflows. D. Money market securities
D. The Reserve Bank of Australia regulates life insurance companies.
63. A life insurance company that sells a large number of ________ will need a large portion of liquid assets to
58. Which of the following statements about life insurance companies is false? match the liabilities.

A. As inflows of funds are relatively predictable, they have a very stable level of liabilities. A. whole-of-life policies
B. Life insurance companies have greatly increased their assets over the past decade. B. 20-year-term policies
C. Life insurance companies sell contracts that offer financial cover against premature death. C. annuities
D. Life insurance companies have large amounts of short-term liquid securities. D. one-year renewable term policies

59. Life insurance companies: 64. General insurance companies hold:

A. are significant investors in equities. A. a smaller number of short-term assets than life insurance companies.
B. invest mainly in debt, which is generally in the form of debentures. B. a greater number of short-term assets than life insurance companies.
C. are not important suppliers of equity funding. C. approximately the same number of short-term assets as life insurance companies.
D. do not match any of these answers. D. only long-term assets.

60. Life insurance offices are providers of superannuation products which make up ______ per cent of the 65. General insurance companies hold more liquid assets than life insurance companies because:
assets of life insurance offices' statutory funds.

A. they have a legal requirement to do so.

A. 57 B. events such as fires and earthquakes are difficult to predict.
B. 67 C. more people try to get payouts from them by fraud.
C. 77 D. there are more items covered under a general insurance policy so there are more payouts to the insured.
D. 87
66. A major difference between a whole-of-life insurance policy and a term-life policy is:
61. In Australia there has been a substantial expansion of assets in the life insurance industry. Which of the
following factors is one of the primary reasons for this?
A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
A. Increased confidence in life policies by individual investors C. only a whole-of-life policy has an investment part.
B. Growth in superannuation funds D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which pays them
C. Decreased cost of regulation by the Australian Financial Institutions Commission out immediately as they are accumulated.
D. Rationalisation through mergers of small life insurance companies
67. Which of the following does NOT apply to a whole-of-life insurance policy?

A. It includes an investment component

B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
D. Premiums reduce over time owing to accumulated bonuses
68. In a/an _____ insurance policy, there is no savings component. 74. A hedge fund that takes a short position in equity markets:

A. term A. will sell forward shares.

B. variable B. will buy a derivative that they expect will increase in price.
C. whole C. will buy shares.
D. endowment D. is expecting the markets to increase.
69. In relation to insurance for term-life policies with a stepped premium over time, the policy holder pays 75. Finance companies generally:
premiums:

A. issue shares and use the proceeds to buy bonds.

A. based on current market rates. B. raise funds in financial markets to lend to households and companies.
B. that increase gradually over time. C. raise funds from banks to lend to households and companies.
C. based on increases in inflation. D. issue bonds and use the proceeds to buy shares.
D. based on indexing the sum insured.
76. Which of the following statements is NOT a feature of finance companies?
70. A portfolio manager for a general insurance company who expects a downturn in the markets is likely to
shift more of the company's portfolio into:
A. Finance companies came into existence in response to regulations on interest rates.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers.
A. common stock. C. The majority of finance companies' funds are sourced from banks.
B. long-term corporate bonds. D. Today the banks own many large finance companies.
C. preference shares.
D. short-term securities. 77. Since deregulation of the financial markets in the 1980s, finance companies have seen the largest growth in
their assets in:
71. For motor vehicle insurance, a third party policy means:

A. bills of exchange.
A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or party. B. local government securities.
B. the policy covers damage to both parties. C. placements and deposits.
C. the policy covers damage or loss to a third party or property only. D. loans to businesses.
D. the policy covers damage to the named vehicle plus any theft.
78. Finance companies use their funds to provide:
72. A fund that aims to achieve high investment returns by using exotic financial products is called a:

A. loans to individuals.
A. a hedge fund. B. instalment credit to finance retail sales to retail stores.
B. project fund. C. lease financing.
C. money market fund. D. all of the given answers.
D. leverage fund.
79. By the end of the 1990s, there had been a substantial contraction in the building society sector. What is the
73. A hedge fund that takes a long position in the Australian foreign exchange market is forecasting Australian principal reason for this contraction in building societies?
foreign currency will:

A. Loss of confidence in building societies by individual investors

A. decrease. B. Conversion of building societies to banks
B. increase. C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA)
C. stay the same. D. Rationalisation through the merger of small building societies
D. decrease in the long-term.
80. Which of the following statement about building societies in Australia is incorrect? 86. The uses of funds for credit unions are mainly:

A. The main activities of building societies are to take in deposits and provide mortgage finance. A. company shares.
B. The largest building societies have tended to convert to regional banks in recent times. B. commercial paper.
C. Now currently the building society sector holds 2 per cent of the total assets of the Australian financial C. debentures and unsecured notes.
system. D. mortgages.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
87. Credit unions, while representing a very small proportion of total financial assets, have strong numerical
81. Under deregulation, building societies lost market share to other financial institutions. Their response representation throughout Australia. They derive this numerical strength:
included:

A. from a common bond of association among society members.

A. mergers with other building societies. B. through the wide dispersion of societies throughout the country.
B. expenditure on technology. C. because of the full range of financial services provided.
C. expanding their range of products. D. because of a guarantee of deposits provided by the government.
D. all of the given answers.
88. Which of the following holds the smallest percentage of total assets of financial institutions: finance
82. In Australia permanent building societies are supervised by: companies, credit unions, managed funds and permanent building societies?

A. ASIC. A. Building societies

B. APRA. B. Credit unions
C. the Reserve Bank of Australia. C. Finance companies
D. ASX. D. Managed funds
83. A ________ is a financial intermediary that deals mainly in the flow of funds between members. 89. Export Finance and Insurance Corporation's function is:
Membership is generally derived from some common bond.

A. solely to lend directly to small- or medium-sized businesses involved in export trade.

A. savings bank B. solely to guarantee trade finance to small- or medium- sized businesses involved in export trade.
B. superannuation fund C. to encourage export trade by providing trade insurance and financial services.
C. credit union D. solely to provide insurance for Australian suppliers of goods and services against non-payment.
D. merchant bank
90. The form of financing for large tourist resorts, property developments, heavy industry and processing plant
84. A credit union differs from most other financial institutions because: developments is called:

A. it accepts deposits mainly from members. A. euro finance.

B. its assets are mainly loans to members. B. conglomerate finance.
C. there are stringent requirements to hold prime liquid assets. C. project finance.
D. all of the given answers are correct. D. lease finance.

85. An important source of funds for credit unions is: 91. The main difference between project finance and other forms of lending is:

A. cheque accounts. A. lenders base their participation on expected future cash flows and assets of the project.
B. loan interest. B. lenders take a major equity stake in the project.
C. interest from government securities. C. the project company, which is set up as a separate legal entity, relies heavily on venture capitalists for
D. financial support from the organisations that employ its members. equity funding.
D. the lenders have a claim on the assets of the project as well as the sponsors.
92. Which of the following features is NOT generally true of project finance in Australia? 101. Cash management trusts are restricted under their trust deed to hold only bank deposits and cash.

True False
A. Guarantees provided by sponsors to lenders usually do not cover all the risks involved in the project.
B. A project company is usually established as a separate legal entity. 102. An insurance company is not a depository financial institution.
C. Lenders rely mainly on the expected future cash flows and the assets of the project.
D. Finance is usually established on a non-recourse basis. True False

True / False Questions Short Answer Questions

93. Unlike commercial banks, investment banks only accept deposits from large corporations. 103. Explain the role and operation of one of the largest types of managed funds, superannuation funds.

True False
94. As investment banks have increased their underwriting activities in recent years, the number of financial
assets held by them has similarly increased.

True False
95. In the context of a merger, the process of due diligence involves valuing the target company shares.

True False 104. Explain the operation of cash management trusts.

96. In relation to Australian managed funds, cash management trusts currently have the largest amount of funds
under management.

True False
97. In relation to Australian managed funds, superannuation funds currently have the largest amount of funds
under management.

True False
105. Identify and discuss the types of public unit trusts according to their assets.
98. A capital guaranteed fund guarantees that contributors will receive at least the value of the contributions
and future earnings of the fund.

True False
99. A managed growth fund is designed to maximise the return from appreciation in the value of assets in its
portfolio.

True False
100. On average, the value of a balanced growth fund is subject to less market fluctuation than that of a capital
growth fund.

True False
106. What do hedge funds do? Discuss any concerns their operations may have for the financial system.
Chapter 03 - Test Bank Key

Multiple Choice Questions

1. The financial institution that is a specialist provider of financial and advisory services to companies is
a/an:
107. What are the principal assets of a finance company? How have these been affected in recent years?
A. credit union.
B. finance company.
C. building society.
D. investment bank.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks

2. Money market corporations:

A. obtain all their funding by issuing bank bills.

B. are generally referred to as investment banks.
C. offer money market deposits to retail clients.
D. sell money market securities to retail clients.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks

3. The task of the investment bank in a public issue of new shares is to:

A. offer interim financing to the firm.

B. invest the funds raised in the capital markets.
C. provide advice in designing and pricing a share issue.
D. act as a trustee of the funds raised.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
4. Investment banks: 8. Most corporations will seek advice from a/an ______ on possible mergers and acquisitions.

A. are supervised by APRA, since they operate in the banking sector. A. investment broker
B. focus their activities in the bank bill sector and money market. B. commercial banker
C. obtain their deposits only from large corporations. C. accounting firm
D. are not required to comply with minimum capital adequacy requirements like commercial banks are D. investment banker
required to.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
9. The process of due diligence involves:
5. A company may hire a/an ________ to advise on and underwrite its new share issue.

A. underwriting of new equity issues by a company.

A. loans officer B. providing advice to companies on the raising of new equity.
B. investment banker C. detailed analysis of a firm's financial statements.
C. share analyst D. placement of securities to institutional investors.
D. treasury officer
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
10. The detailed analysis of a firm's financial statements as part of a possible takeover is called:
6. According to the text, the principal source of income for investment banks is:

A. share analysis.
A. issuing bank bills. B. technical analysis.
B. off-balance-sheet business. C. due diligence.
C. issuing secondary securities. D. project management.
D. issuing certificates of deposit.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
11. Underwriting is when a/an:
7. Money market corporations (merchant and investment banks) have significantly increased their off-
balance-sheet business on account of competition. All of the following are off-balance-sheet activities
of investment banks except: A. broker places new share issues with selected financial institutions.
B. investment bank gives advice to a company about a merger.
C. broker or a financial institution guarantees prices on a security issue for a company.
A. mergers and acquisitions. D. investment bank finds funding for a company.
B. managing project finance undertakings.
Difficulty: Easy
C. trading in the short-term money market. Est time: <1 minute
D. strategic risk management advice. Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
12. When an investment bank guarantees a certain price for a company issuing new shares, it is acting as 16. The ________ is the company in a merger transaction that is being pursued as a takeover possibility.
a/an:

A. target company
A. auctioneer. B. takeover company
B. broker. C. conglomerate company
C. dealer. D. hostile company
D. underwriter.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
17. If a car manufacturer were to purchase one of the companies listed below, which purchase would be
13. When an investment bank helps a company sell large parcels of shares directly to institutional investors, called a horizontal takeover?
this is called:

A. A steel mill
A. due diligence. B. A rival car manufacturer
B. placement. C. A tyre manufacturer
C. securitisation. D. A finance company
D. underwriting.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
18. If a car manufacturer were to purchase one of the companies listed below, which purchase would be
14. The ________ is the company in a merger transaction that tries to merge with or acquire another called a vertical takeover?
company.

A. An electronic components supplier

A. target company B. A rival car manufacturer
B. takeover company C. A travel company
C. conglomerate company D. A finance company
D. hostile company
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
19. A conglomerate takeover occurs when:
15. Venture capital is:

A. companies from different business areas merge.

A. funding provided for a new start-up business by a group of investors. B. both parties are similar in size.
B. providing advice to companies on the raising of new capital. C. the merged entity is expected to have large additional value.
C. short-term funding provided by banks. D. the management team of the target company is combined with that of the takeover company.
D. placement of securities to institutional investors.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Section: 3.1 Investment banks and merchant banks
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
20. The following factors are all reasons for mergers except: 24. 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. finances.
B. economies of scale. A. managed growth funds.
C. business diversification. B. capital guaranteed funds.
D. reduction of debt. C. balanced growth funds.
D. capital stable funds.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
Est time: <1 minute
mergers and acquisitions.
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Section: 3.1 Investment banks and merchant banks
Section: 3.2 Managed funds

21. The financial institution that pools funds for individuals and then invests them in both the money and 25. An investor who wishes to save for their retirement in 20 years' time and who has a high propensity for
capital markets is a: taking risk is likely to invest in a managed fund which invests in government securities and:

A. savings bank. A. cash deposits.

B. credit union. B. some property.
C. investment bank. C. debentures.
D. managed fund. D. foreign equities.
Difficulty: Easy
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Section: 3.2 Managed funds
Section: 3.2 Managed funds

22. Which of the following statements about managed funds is incorrect? 26. Managed fund managers:

A. The assets of large managed funds may be managed by several professional managers. A. invest funds according to their fund's trust deed.
B. A mutual fund is required to use the services of a mutual fund custodian. B. generally reinvest income and any capital gains in the fund.
C. Sources of funds for a managed fund may be in the form of monthly payments. C. will usually maintain a diversified portfolio of assets within the asset classes.
D. For Australia, recent figures show that the statutory funds of life offices have the largest amounts of D. all of the given answers.
assets under management.
Difficulty: Easy
Difficulty: Medium Est time: <1 minute
Est time: <1 minute Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth. Section: 3.2 Managed funds
Section: 3.2 Managed funds
27. Funds under management by managed funds in 2010 have a value of:
23. A managed fund that is established under a trust deed and is managed by a responsible entity is called
a:
A. $345b.
B. $500b.
A. mutual fund.
C. $1000b.
B. trust fund.
D. $1666b.
C. trustee fund.
D. investment fund. Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Difficulty: Easy
Section: 3.2 Managed funds
Est time: <1 minute
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Section: 3.2 Managed funds
28. A mutual investment fund that specialises in short-term debt instruments and managed by a financial 32. Since the early 1990s, public unit trusts have seen the largest growth in assets in:
intermediary is called a:

A. cash and deposits.

A. money market fund. B. long-term government securities.
B. cash management trust. C. equities and units in trusts.
C. certificate of deposit fund. D. land and buildings.
D. bank bill fund.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Est time: <1 minute
Section: 3.4 Public unit trusts
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.3 Cash management trusts
33. The majority of securities owned by unlisted public unit trusts are:
29. The main feature of cash management trusts is:

A. real physical assets.

A. they allow individuals to access the money markets. B. money market securities.
B. they provide liquidity and access to funds. C. capital market securities.
C. that many are associated with stockbrokers and the electronic purchasing and selling of securities by D. fixed interest trusts.
investors.
Difficulty: Medium
D. all of the given answers. Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Difficulty: Medium Section: 3.4 Public unit trusts
Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.3 Cash management trusts
34. Which of the following statements is NOT a feature of public unit trusts?

30. The largest proportion of funds held by cash management funds in Australia is in:
A. The four main classes of trusts are property, equity, mortgage and fixed interest trusts.
B. There was enormous growth in public unit trusts during the 1990s.
A. cash and deposits. C. The majority of mortgages held by a mortgage trust are ‘first' mortgages.
B. bills of exchange. D. Property trusts are generally unlisted as they need notice to sell their physical assets.
C. promissory notes and CDs.
Difficulty: Medium
D. bills of exchange and CDs. Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Difficulty: Medium Section: 3.4 Public unit trusts
Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.3 Cash management trusts
35. An investor is considering different methods of investment, including a public unit trust. Which of the
following is NOT a function of a public unit trust?
31. Which of the following statements is NOT a feature of unit trusts?

A. Acting as a vehicle for the pooling of investor funds

A. Unit trusts are companies that accept funds from investors and make investments that yield returns in B. Providing a level of investor protection though the appointment of a trustee
the form of income and/or capital gains. C. Allowing small investors access to larger investment opportunities
B. The market determines the value of a listed unit trust. D. Locking in a trust unit price by listing on the Australian Securities Exchange
C. Unlisted unit trusts are generally highly liquid as they can accept money from investors at any time.
Difficulty: Medium
D. The number of listed property trusts is far larger than the number of listed equity trusts. Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Difficulty: Medium Section: 3.4 Public unit trusts
Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.4 Public unit trusts
36. A developer is promoting a large new suburban shopping centre and decides to establish a publicly 40. Essentially, superannuation assets provide:
listed unit trust to attract investors. Which type of unit trust would likely be established?

A. indefinite income when employees stop working.

A. A mortgage trust B. indefinite income as long as employees continue to work.
B. A property trust C. limited income if an employee is injured and unable to work.
C. An equity trust D. retirement income for employees.
D. A cash management trust
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Est time: <1 minute
fund.
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.5 Superannuation funds
Section: 3.4 Public unit trusts

37. The main advantage of a listed trust over an unlisted unit trust is that a listed trust: 41. Recent figures about superannuation assets in Australia show that the largest amounts of assets are in
the ____:

A. has a trustee but an unlisted trust does not.

B. can be sold at any time by the unit holder in the marketplace. A. corporate superannuation funds.
C. invests in equities, while an unlisted trust invests only in fixed interest. B. industry corporation funds.
D. invests in equities, while an unlisted trust invests in property. C. retail superannuation funds.
D. self-managed superannuation funds.
Difficulty: Easy
Est time: <1 minute Difficulty: Medium
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts. Est time: <1 minute
Section: 3.4 Public unit trusts Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
Section: 3.5 Superannuation funds
38. In Australia, listed property trusts dominate over the proportion of unlisted property unit trusts because:
42. Which of the following statements is true?
A. the valuations of buildings are larger than share valuations.
B. mortgages on buildings are larger than companies' valuations. A. Since the 1990s, assets of superannuation funds outside life insurance offices have grown much
C. listed shares can be more advantageous in terms of liquidity. slower than life insurance office funds.
D. it reflects the liquid nature of properties. B. Assets in defined benefit schemes have experienced greater growth than assets in accumulation
Difficulty: Easy
schemes.
Est time: <1 minute C. The introduction of the Superannuation Guarantee Charge (SGC) policy in 1992 resulted in rapid
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.4 Public unit trusts growth in Australia's superannuation industry throughout the 1990s.
D. Industry superannuation funds are regulated superannuation entities with more than ten members that
39. The function of a ________ is to provide income for employees of corporations or governments after provide benefits for employees working in the same industry.
they retire.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
A. building society fund.
Section: 3.5 Superannuation funds
B. credit union
C. general insurer 43. Superannuation funds, because of the ______-term nature of their liabilities, prefer to hold _____-term
D. superannuation fund assets.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of A. long, long
fund.
Section: 3.5 Superannuation funds
B. long, short
C. short, long
D. short, short
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
 fund. Section: 3.5 Superannuation funds
Section: 3.5 Superannuation funds
48. The superannuation fund that involves the amount of benefit paid out on retirement being calculated by
44. A private superannuation fund to which an individual makes recurring, predetermined payments for a a formula based at the time when a person joined the fund is called:
given number of years into the plan is called a/an:

A. a defined benefit fund.

A. approved deposit scheme. B. an accumulation fund.
B. superannuation savings plan. C. a defined termination fund.
C. standard superannuation scheme. D. a defined payout fund.
D. single premium scheme.
Difficulty: Medium
Difficulty: Medium Est time: <1 minute
Est time: <1 minute Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of fund.
fund. Section: 3.5 Superannuation funds
Section: 3.5 Superannuation funds
49. The superannuation fund where the amount of funds available at retirement consists of past
45. If an individual retires early but wants to retain their superannuation entitlements in a favourable contributions plus earnings less taxes and expenses is called:
taxation environment, they can hold their eligible superannuation funds in a:

A. a defined benefit fund.

A. single-premium scheme. B. an accumulation fund.
B. growing annuity scheme. C. a defined termination fund.
C. rollover scheme. D. a defined payout fund.
D. termination scheme.
Difficulty: Medium
Difficulty: Medium Est time: <1 minute
Est time: <1 minute Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of fund.
fund. Section: 3.5 Superannuation funds
Section: 3.5 Superannuation funds
50. The superannuation fund where the employer must make good a shortfall in the fund when the benefit is
46. A defined benefit plan: to be paid up is a/an:

A. is always fully funded, with no shortfall requirement. A. accumulation fund.

B. may have a shortfall, but the Commonwealth government will make good the shortfall. B. defined benefit fund.
C. may have a shortfall, but the employer will make good the shortfall. C. fully funded fund.
D. is where the employee bears the risk if the performance of the investment is bad. D. private fund.
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
fund.
Section: 3.5 Superannuation funds
Section: 3.5 Superannuation funds

47. In an accumulation superannuation fund: 51. When an employee makes regular contributions equal to 7% of their salary and their employer also
contributes the equivalent of 14% of salary to a superannuation fund that is an accumulation scheme:
A. the employee is promised an allocated benefit based on earnings and years of service.
B. superannuation income varies depending on how well the plan's investments have performed. A. the final payout benefit is stated when the member joins the fund.
C. if the funds in the plan exceed the promised amount, the excess remains with the issuing firm or B. the final payout depends upon the investment performance of the fund.
institution. C. payment is specified under the superannuation guarantee legislation.
D. all of the earnings' taxes are paid by the employer. D. the benefit is paid in the form of a life annuity.
Difficulty: Hard
Difficulty: Medium
Est time: <1 minute
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
fund.
 Section: 3.5 Superannuation funds
56. In Australia, the prudential supervisor of life insurance offices is:
52. All of the following Acts or Bills are relevant to the operation of the Australian superannuation industry
except the:
A. ASIC.
B. APRA.
A. Superannuation Industry (Supervision) Act 1993. C. the Reserve Bank of Australia.
B. Income Tax Assessment Act 1936. D. PSLI.
C. Superannuation (Agents and Brokers) Act 1984. Difficulty: Easy
D. Superannuation Guarantee Amendment Bill 2011. Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
Difficulty: Hard
Est time: <1 minute
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of 57. Which of the following statements with regard to life insurance companies is true?
fund.
Section: 3.5 Superannuation funds

53. Which of the following is NOT an important result of the compulsory guarantee charge implemented in A. Life insurance companies are more likely to acquire short-term assets than long-term securities, for
July 1992? liquidity reasons.
B. Life insurance companies are more likely to acquire long-term assets because their liabilities are
long-term in nature.
A. The amount of superannuation funds in Australia has increased significantly. C. Life insurance companies tend to acquire short-term assets because they have relatively predictable
B. The employer contribution SGC increased to 9% from July 2002. inflows and outflows.
C. The vast majority of retirement savings are invested in superannuation funds. D. The Reserve Bank of Australia regulates life insurance companies.
D. The SGC represents a penalty taxation charge on employers.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Est time: <1 minute
Section: 3.6 Life insurance offices
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
Section: 3.5 Superannuation funds 58. Which of the following statements about life insurance companies is false?
54. The amount of financial assets held by insurance companies has _______ over the past 20 years.
A. As inflows of funds are relatively predictable, they have a very stable level of liabilities.
B. Life insurance companies have greatly increased their assets over the past decade.
A. decreased
C. Life insurance companies sell contracts that offer financial cover against premature death.
B. remained stable
D. Life insurance companies have large amounts of short-term liquid securities.
C. increased slowly
D. increased dramatically Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Difficulty: Medium
Section: 3.6 Life insurance offices
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices 59. Life insurance companies:
55. Recent figures show the largest proportion of assets held by life insurance companies is:
A. are significant investors in equities.
B. invest mainly in debt, which is generally in the form of debentures.
A. Commonwealth securities.
C. are not important suppliers of equity funding.
B. loans and placements.
D. do not match any of these answers.
C. equities and units in trusts.
D. land and buildings. Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Difficulty: Hard
Section: 3.6 Life insurance offices
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
60. Life insurance offices are providers of superannuation products which make up ______ per cent of the 64. General insurance companies hold:
assets of life insurance offices' statutory funds.

A. a smaller number of short-term assets than life insurance companies.

A. 57 B. a greater number of short-term assets than life insurance companies.
B. 67 C. approximately the same number of short-term assets as life insurance companies.
C. 77 D. only long-term assets.
D. 87
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Est time: <1 minute
Section: 3.7 General insurance offices
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
65. General insurance companies hold more liquid assets than life insurance companies because:
61. In Australia there has been a substantial expansion of assets in the life insurance industry. Which of the
following factors is one of the primary reasons for this?
A. they have a legal requirement to do so.
B. events such as fires and earthquakes are difficult to predict.
A. Increased confidence in life policies by individual investors C. more people try to get payouts from them by fraud.
B. Growth in superannuation funds D. there are more items covered under a general insurance policy so there are more payouts to the
C. Decreased cost of regulation by the Australian Financial Institutions Commission insured.
D. Rationalisation through mergers of small life insurance companies
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Est time: <1 minute
Section: 3.7 General insurance offices
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
66. A major difference between a whole-of-life insurance policy and a term-life policy is:
62. Life insurance companies attract a large proportion of their funds through regular premiums from policy
holders. In regard to the matching principle, what types of assets would an insurance company hold the
smallest proportions of? A. a whole-of-life policy is long-term, whereas a term policy is only for a term of one year.
B. a term policy has an investment component, specified only for the term.
C. only a whole-of-life policy has an investment part.
A. Equity investments D. term policies only pay bonuses at the end of the term, unlike the whole–of-life policy, which pays
B. Debentures and notes them out immediately as they are accumulated.
C. Housing loan mortgages
Difficulty: Medium
D. Money market securities Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Difficulty: Medium Section: 3.6 Life insurance offices
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
67. Which of the following does NOT apply to a whole-of-life insurance policy?

63. A life insurance company that sells a large number of ________ will need a large portion of liquid
assets to match the liabilities. A. It includes an investment component
B. It is a long-term insurance policy
C. It may pay a bonus if surplus investment returns are generated
A. whole-of-life policies D. Premiums reduce over time owing to accumulated bonuses
B. 20-year-term policies
Difficulty: Medium
C. annuities Est time: <1 minute
D. one-year renewable term policies Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
Difficulty: Medium
Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.6 Life insurance offices
68. In a/an _____ insurance policy, there is no savings component. 72. A fund that aims to achieve high investment returns by using exotic financial products is called a:

A. term A. a hedge fund.

B. variable B. project fund.
C. whole C. money market fund.
D. endowment D. leverage fund.
Difficulty: Easy Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer. Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.6 Life insurance offices Section: 3.8 Hedge funds

69. In relation to insurance for term-life policies with a stepped premium over time, the policy holder pays 73. A hedge fund that takes a long position in the Australian foreign exchange market is forecasting
premiums: Australian foreign currency will:

A. based on current market rates. A. decrease.

B. that increase gradually over time. B. increase.
C. based on increases in inflation. C. stay the same.
D. based on indexing the sum insured. D. decrease in the long-term.
Difficulty: Medium Difficulty: Easy
Est time: <1 minute Est time: <1 minute
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer. Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.6 Life insurance offices Section: 3.8 Hedge funds

70. A portfolio manager for a general insurance company who expects a downturn in the markets is likely to 74. A hedge fund that takes a short position in equity markets:
shift more of the company's portfolio into:

A. will sell forward shares.

A. common stock. B. will buy a derivative that they expect will increase in price.
B. long-term corporate bonds. C. will buy shares.
C. preference shares. D. is expecting the markets to increase.
D. short-term securities.
Difficulty: Easy
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Est time: <1 minute
Section: 3.8 Hedge funds
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.7 General insurance offices
75. Finance companies generally:
71. For motor vehicle insurance, a third party policy means:

A. issue shares and use the proceeds to buy bonds.

A. the policy covers damage to the named vehicle plus any damage to any third party vehicle or party. B. raise funds in financial markets to lend to households and companies.
B. the policy covers damage to both parties. C. raise funds from banks to lend to households and companies.
C. the policy covers damage or loss to a third party or property only. D. issue bonds and use the proceeds to buy shares.
D. the policy covers damage to the named vehicle plus any theft.
Difficulty: Medium
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: <1 minute
business.
Learning Objective: 03-05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of insurer.
Section: 3.9 Finance companies and general financiers
Section: 3.7 General insurance offices
76. Which of the following statements is NOT a feature of finance companies? 80. Which of the following statement about building societies in Australia is incorrect?

A. Finance companies came into existence in response to regulations on interest rates. A. The main activities of building societies are to take in deposits and provide mortgage finance.
B. Finance companies sell unsecured notes and use the funds to make loans to borrowers. B. The largest building societies have tended to convert to regional banks in recent times.
C. The majority of finance companies' funds are sourced from banks. C. Now currently the building society sector holds 2 per cent of the total assets of the Australian
D. Today the banks own many large finance companies. financial system.
D. Building societies are authorised deposit-taking institutions and supervised by APRA.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: <1 minute
business.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Section: 3.9 Finance companies and general financiers
these sectors.
Section: 3.1 Investment banks and merchant banks
77. Since deregulation of the financial markets in the 1980s, finance companies have seen the largest
growth in their assets in: 81. Under deregulation, building societies lost market share to other financial institutions. Their response
included:

A. bills of exchange.
B. local government securities. A. mergers with other building societies.
C. placements and deposits. B. expenditure on technology.
D. loans to businesses. C. expanding their range of products.
D. all of the given answers.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: <1 minute
business.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Section: 3.9 Finance companies and general financiers
these sectors.
Section: 3.1 Investment banks and merchant banks
78. Finance companies use their funds to provide:
82. In Australia permanent building societies are supervised by:

A. loans to individuals.
B. instalment credit to finance retail sales to retail stores. A. ASIC.
C. lease financing. B. APRA.
D. all of the given answers. C. the Reserve Bank of Australia.
D. ASX.
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: <1 minute
business.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Section: 3.9 Finance companies and general financiers
these sectors.
Section: 3.1 Investment banks and merchant banks
79. By the end of the 1990s, there had been a substantial contraction in the building society sector. What is
the principal reason for this contraction in building societies? 83. A ________ is a financial intermediary that deals mainly in the flow of funds between members.
Membership is generally derived from some common bond.

A. Loss of confidence in building societies by individual investors

B. Conversion of building societies to banks A. savings bank
C. Increased cost of regulation by the Australian Prudential Regulation Authority (APRA) B. superannuation fund
D. Rationalisation through the merger of small building societies C. credit union
D. merchant bank
Difficulty: Medium
Est time: <1 minute
Difficulty: Easy
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Est time: <1 minute
these sectors.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
these sectors.
Section: 3.1 Investment banks and merchant banks
84. A credit union differs from most other financial institutions because: 88. Which of the following holds the smallest percentage of total assets of financial institutions: finance
companies, credit unions, managed funds and permanent building societies?

A. it accepts deposits mainly from members.

B. its assets are mainly loans to members. A. Building societies
C. there are stringent requirements to hold prime liquid assets. B. Credit unions
D. all of the given answers are correct. C. Finance companies
D. Managed funds
Difficulty: Easy
Est time: <1 minute
Difficulty: Hard
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Est time: <1 minute
these sectors.
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Section: 3.1 Investment banks and merchant banks
these sectors.
Section: 3.1 Investment banks and merchant banks
85. An important source of funds for credit unions is:
89. Export Finance and Insurance Corporation's function is:

A. cheque accounts.
B. loan interest. A. solely to lend directly to small- or medium-sized businesses involved in export trade.
C. interest from government securities. B. solely to guarantee trade finance to small- or medium- sized businesses involved in export trade.
D. financial support from the organisations that employ its members. C. to encourage export trade by providing trade insurance and financial services.
D. solely to provide insurance for Australian suppliers of goods and services against non-payment.
Difficulty: Easy
Est time: <1 minute
Difficulty: Medium
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in
Est time: <1 minute
these sectors.
Learning Objective: 03-09 Describe the unique role of export finance corporations.
Section: 3.1 Investment banks and merchant banks
Section: 3.1 Investment banks and merchant banks

86. The uses of funds for credit unions are mainly: 90. The form of financing for large tourist resorts, property developments, heavy industry and processing
plant developments is called:
A. company shares.
B. commercial paper. A. euro finance.
C. debentures and unsecured notes. B. conglomerate finance.
D. mortgages. C. project finance.
Difficulty: Easy D. lease finance.
Est time: <1 minute
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in Difficulty: Easy
these sectors. Est time: <1 minute
Section: 3.1 Investment banks and merchant banks Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: Extended learning LO 3.10
87. Credit unions, while representing a very small proportion of total financial assets, have strong numerical
representation throughout Australia. They derive this numerical strength: 91. The main difference between project finance and other forms of lending is:

A. from a common bond of association among society members. A. lenders base their participation on expected future cash flows and assets of the project.
B. through the wide dispersion of societies throughout the country. B. lenders take a major equity stake in the project.
C. because of the full range of financial services provided. C. the project company, which is set up as a separate legal entity, relies heavily on venture capitalists
D. because of a guarantee of deposits provided by the government. for equity funding.
Difficulty: Easy D. the lenders have a claim on the assets of the project as well as the sponsors.
Est time: <1 minute
Learning Objective: 03-08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurred in Difficulty: Medium
these sectors. Est time: <1 minute
Section: 3.1 Investment banks and merchant banks Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: Extended learning LO 3.10
92. Which of the following features is NOT generally true of project finance in Australia?
96. In relation to Australian managed funds, cash management trusts currently have the largest amount of
funds under management.
A. Guarantees provided by sponsors to lenders usually do not cover all the risks involved in the project.
B. A project company is usually established as a separate legal entity. FALSE
C. Lenders rely mainly on the expected future cash flows and the assets of the project.
D. Finance is usually established on a non-recourse basis. Superannuation trusts have the largest amount of funds under management.

Difficulty: Medium
Est time: <1 minute Difficulty: Easy
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular Est time: <1 minute
mergers and acquisitions. Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: Extended learning LO 3.10 Section: 3.3 Cash management trusts

97. In relation to Australian managed funds, superannuation funds currently have the largest amount of
funds under management.
True / False Questions
TRUE

93. Unlike commercial banks, investment banks only accept deposits from large corporations. Since the introduction of compulsory superannuation, superannuation funds have achieved significant
growth.
FALSE
Difficulty: Easy
Investment banks are specialist providers of financial and advisory services to corporations, high-net- Est time: <1 minute
worth individuals and governments. Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of
fund.
Section: 3.5 Superannuation funds

Difficulty: Easy
Est time: <1 minute
98. A capital guaranteed fund guarantees that contributors will receive at least the value of the contributions
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular and future earnings of the fund.
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
FALSE
94. As investment banks have increased their underwriting activities in recent years, the number of financial
assets held by them has similarly increased. Only the capital is guaranteed.

FALSE
Difficulty: Easy
Est time: <1 minute
The number of financial assets held by them has decreased as they are focused on advisory services. Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Section: 3.2 Managed funds

Difficulty: Easy
99. A managed growth fund is designed to maximise the return from appreciation in the value of assets in
Est time: <1 minute its portfolio.
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks TRUE

95. In the context of a merger, the process of due diligence involves valuing the target company shares. The proportion of equity is generally larger than for a balanced growth fund and the equity part of the
fund includes a greater range of risk securities than a balanced growth fund. These offer the possibility
FALSE of potentially higher returns.

Due diligence is detailed analysis of the financial and operational condition of the target company.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Difficulty: Easy Section: 3.2 Managed funds
Est time: <1 minute
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off-balance-sheet business, in particular
mergers and acquisitions.
Section: 3.1 Investment banks and merchant banks
100. On average, the value of a balanced growth fund is subject to less market fluctuation than that of a 104. Explain the operation of cash management trusts.
capital growth fund.

TRUE
A cash management trust invests the majority of its funds in money market securities such as bills and
The proportion of equity is lower and so a balanced growth fund has generally lower volatility. commercial paper. They provide a high degree of liquidity and often a higher rate of return for the short-
term funds of smaller investors as a consequence of indirect access to the wholesale money markets.
Difficulty: Easy
Est time: <1 minute Est time: 1-3 minutes
Learning Objective: 03-02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth. Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.2 Managed funds Section: 3.3 Cash management trusts

101. Cash management trusts are restricted under their trust deed to hold only bank deposits and cash. 105. Identify and discuss the types of public unit trusts according to their assets.

FALSE

Cash management trusts are generally restricted to short-term money market securities. Public unit trusts may be grouped into property trusts, both listed and unlisted; equity trusts, both listed
and unlisted; mortgage trusts, and other trusts including fixed interest trusts. Two major types of trusts
according to assets under management are listed property trusts and listed equity trusts.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
Section: 3.3 Cash management trusts Est time: 1-3 minutes
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts.
102. An insurance company is not a depository financial institution. Section: 3.4 Public unit trusts

106. What do hedge funds do? Discuss any concerns their operations may have for the financial system.
TRUE

Insurance companies receive funds in the form of premiums.

Hedge funds use supposedly complicated investment strategies and invest in exotic financial products to
Difficulty: Easy try to achieve higher returns. Some of the instruments they invest in are commodities, private equity,
Est time: <1 minute foreign exchange, bonds and derivatives. They tend to leverage their positions using derivative products
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.5 Superannuation funds and are vulnerable to pressure to liquidate assets quickly if they sustain significant losses. They also
operate largely outside the regulatory framework established to protect the stability of the financial
system.

Short Answer Questions

Est time: 1-3 minutes
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk.
Section: 3.8 Hedge funds
103. Explain the role and operation of one of the largest types of managed funds, superannuation funds.
107. What are the principal assets of a finance company? How have these been affected in recent years?

Their sources of funds are individuals who set aside funds for their retirement so that they can maintain
The main assets are loans to individuals, instalment credit to finance retail sales, lease financing, loans
their lifestyle once they retire from the workforce. The majority of members make regular contributions
to businesses including floor plan financing, factoring and accounts receivable financing.
over their working life. The superannuation funds invest these funds in a range of assets from money
market, government securities, property and domestic and international equities.
Est time: 1-3 minutes
Learning Objective: 03-07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance company
Est time: 1-3 minutes business.
Learning Objective: 03-04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types of Section: 3.9 Finance companies and general financiers
fund.
Section: 3.5 Superannuation funds
 Chapter 03 - Test Bank Summary

Category # of Questio
ns
Difficulty: Easy 45
Difficulty: Hard 5
Difficulty: Medium 52
Est time: <1 minute 102
Est time: 1-3 minutes 5
Learning Objective: 03-01 Describe the roles of investment banks and merchant banks, with an emphasis on the nature of their off- 26
balance-sheet business, in particular mergers and acquisitions.
Learning Objective: 03- 10
02 Explain the structure, roles and operation of managed funds and identify factors that have influenced their rapid growth.
Learning Objective: 03-03 Discuss the purpose and operation of cash management trusts and public unit trusts. 15
Learning Objective: 03- 17
04 Describe the nature and roles of superannuation funds, including the primary sources of superannuation funds and the different types
of fund.
Learning Objective: 03- 18
05 Define life insurance offices and general insurance offices and explain the main types of insurance policies offered by each type of i
nsurer.
Learning Objective: 03-06 Discuss hedge funds, including their structure, investors, investment strategies and risk. 5
Learning Objective: 03- 5
07 Explain the principal functions of finance companies and general financiers and the changes that have had an impact on finance com
pany business.
Learning Objective: 03- 10
08 Outline the roles and relative importance of building societies and credit unions and analyse the significant changes that have occurr
ed in these sectors.
Learning Objective: 03-09 Describe the unique role of export finance corporations. 1
Section: 3.1 Investment banks and merchant banks 33
Section: 3.2 Managed funds 10
Section: 3.3 Cash management trusts 6
Section: 3.4 Public unit trusts 9
Section: 3.5 Superannuation funds 18
Section: 3.6 Life insurance offices 14
Section: 3.7 General insurance offices 4
Section: 3.8 Hedge funds 4
Section: 3.9 Finance companies and general financiers 5
Section: Extended learning LO 3.10 3