Addis Ababa University School of Commerce

Accounting & Finance Program Unit

Financial Markets & Institutions
Model Exit Examination

Choose the best Answer from the alternatives given

1. Financial market activities affect
A. personal wealth.
B. spending decisions by individuals and business firms.
C. the economy’s location in the business cycle.
D. all of the above
E. None of the above
2. Which of the following is not an example of financial intermediation?
A. An Internet company issues shares by selling shares directly to buyers.
B. A woman opening a new business borrows funds from her uncle.
C. A professor purchases shares directly from a share company.
D. A bank extends a mortgage loan to a household.
E. All except D
3. Hedgers are primarily interested in
A. betting on anticipated changes in prices.
B. reducing the spread between bid and ask prices on bonds.
C. increasing market liquidity.
D. reducing their exposure to the risk of price fluctuations.

4. Suppose the exchange rate between South Sudan Pound(SSP) and Ethiopian Birr(ETB) is
2.4SSP per ETB while the exchange ratebetween Danish Kroner(DKK) and Ethiopian Birr is
0.13DKK per ETB. What is the exchange rate between SSP andDKK?
A. 18.46SSP per DKK D. 6 DKK per SSP
B. 0.312 DKK per SSP E. None of the above
C. 0.054SSP per DKK

5. Suppose the interest rate on short term bonds will rise by 4% next year and the current
interest rate on short term bonds is 8%. If the interest rate on two year bonds is 9.5%, which
bonds would you prefer to have been holding based on pure expectations theory?
A. Short term bonds
B. Two year bonds
C. Either short term bonds or two year bonds
D. Insufficient data to make choice
E. None of the above
6. According to the liquidity premium theory of the term structure,
A. the interest rate on long-term bonds will equal an average of short-term interest rates that
people expect to occur over the life of the long-term bonds plus a liquidity premium.
B. buyers of bonds may prefer bonds of one maturity over another, yet interest rates on
bonds of different maturities move together over time.
C. even with a positive liquidity premium, if future short-term interest rates are expected to
fall significantly, then the yield curve will be downward-sloping.
D. all of the above.
E. only (A) and (B) of the above.
7. The size of the initial margin payable on a futures contract is mostly related to:
A. The past financial record of the buyer of the contract
B. The number of contracts entered into by the buyer
C. The volatility of the price of the underlying asset
D. The length of the contract
8. Which three of the following are characteristics of corporate bonds?

a) Long-term financial instruments

b) Short-term financial instruments
c) Generally traded in over-the-counter market
d) time deposits
e) issued by corporations

A. a, c, and d C. b, c, and d
B. a, c, and e D. b, d, and e

9. You paid Br25 per share for a call option on 500 shares of HW Share Company at a strike
price of Br200 per share. At expiration, HW’s share is selling at Br170 per share.
A. Your total net profit is Br12,500. D. Your total net profit is Br2,500.
B. Your total net loss is Br12,500. E. None of the above
C. Your total net profit is Br15,000.

10. In the above question, what would be the total net profit (loss) to you if it was a put option?
A. Your total net profit is Br12,500.
B. Your total net loss is Br12,500.
C. Your total net profit is Br15,000.
D. Your total net profit is Br2,500.
E. None of the above
11. All of the following are arguments against regulation of financial system except
A. Protecting firms from failure C. Discouraging innovation
B. Increasing compliance costs D. Discouraging efficiency
12. If market interest rates are 10%, the market price of a 9%, 4-months CD for Br100,000 with
73 days to maturity is:
A. Br103,000 C. Br103,333
B. Br100,980 D. None of the above
13. Everything else constant, appreciation of Birr relative to Canadian Dollar (C$) will mean that
A. Vacationing in Canada becomes more expensive for an Ethiopian.
B. Vacationing in Canada becomes less expensive for an Ethiopian.
C. Canadian Dollar depreciates relative to Birr with same percentage.
D. Both (A) and (C)
E. Both (B) and (C)
14. (I) Bondholders hold a claim on assets that has priority over the claims of preferred
stockholders. (II) puttable preferred stock is a type of preferred stock that the holder may,
upon certain conditions, force the issuer to sell its shares
A. (I) is true, (II) false. C. Both are true.
B. (I) is false, (II) true. D. Both are false.
15. Which of the following is potentially obligated to sell an asset at a predetermined price in the
options contract?
A. A call writer C. A call buyer
B. A put buyer D. A put writer

16. Which of the following is a goal of financial regulation?

A. Facilitating progress
B. Ensuring that investors never suffer losses
C. Making companies more efficient
D. Providing information to investors
17. The Ethiopia Commodity Exchange (ECX) is a ______ exchange established in Addis
Ababa.
A. Forward C. Both
B. Spot D. None of the above

18. National bank of Ethiopia

A. Act as banker, fiscal agent and financial advisor to the Government
B. Accept deposits of any kind from foreign sources
C. Establish and manage deposit insurance fund
D. Insure commercial banks against income losses
E. All except D

19. When Tigat Corporation sells its stock to Tangut in the primary market, how much money is
received by Tigat Corporation?
A. It will receive only the commissions on the sale of stock.
B. It will receive most of the funds, except for commissions.
 C. It will receive both sales price and commissions.
D. It will receive nothing

20. According to the segmented markets theory of the term structure,

A. The present long-term interest rates depend entirely on future short-term rates.
B. The choice of long-term versus short-term securities is determined according to the
need for the securities
C. Interest rates on bonds of different maturities move together over time.
D. All of the above.

21. The regulatory body for Ethiopian Commodity Exchange (ECX) is?
A. Accounting & Auditing Board of Ethiopia
B. Ethiopian Commodity Exchange Clearing House
C. Ethiopian Commodity Exchange Authority
D. Federal Office of Auditors General

22. Why is margin deposit is required in futures contracts

A. To allow people to make high rates of profit
B. To reduce the risk of default on contracts
C. To make futures contracts more readily tradable
D. To allow poor people to participate in futures trading
23. Suppose pound sterling appreciates by 6.4% relative to Ethiopian Birr. What is the
percentage depreciation of Ethiopian Birr?
A. 6.4% D. 5.48%
B. 6.82% E. None of the above
C. 6.02%

24. Of the following types of financial regulation, which one is mostly implemented to improve
monetary control?
A. Reserve requirements
B. Restrictions on Entry
C. Limits on Competition
D. Restrictions on Assets and Activities

25. In which of the following situations would you prefer to be lender?

A. The nominal interest rate is 15% and the expected inflation rate is 12%.
B. The real interest rate is 5% and the expected inflation rate is 7%.
C. The nominal interest rate is 10% and the expected inflation rate is 14%.
D. The real interest rate is 8% and the expected inflation rate is 6%.
26. The money market is the market in which _________ are traded.
A. new issues of securities
B. previously issued securities
C. short-term debt instruments
D. long-term debt and equity instruments
27. Financial institutions that give loans to businesses but do not take deposits are
A. Contractual savings institutions
B. Finance companies
C. Brokers
D. credit unions
28. Which of the following is a contractual savings institution?
A. Saving banks
B. Investment banks
C. Micro-finance institutions
D. A fire and casualty insurance company
29. Financial instruments are _____ for the person who buys them, but are _____ for the
individual or firm that issues them.
A. liabilities; assets C. assets; liabilities
B. negotiable; nonnegotiable D. nonnegotiable; negotiable
30. Which of the following is most likely a Surplus Budget Unit (SBU)?
A. A firm that sells its investment in shares of other companies
B. A corporation that redeems its bonds
C. An individual that borrows from a bank
D. All of the above
31. In which types of securities that life insurance companies mostly invest?
A. Commercial papers C. Long-term corporate bonds
B. Treasury bills D. A and B
32. When the financial system lacks the capability of making judgments about investment
opportunities due to asymmetric information, leading to potentially bad credit risks, lending
is subject to
A. adverse selection. C. social goods.
B. moral hazard. D. hyperinflation.

33. A checking deposit in a commercial bank is _______ of the bank.

A. an asset C. a liability
B. a net worth D. a capital
34. Which of the following is not a function of financial system?
A. It provides convenient mode of payments.
B. It reduces the borrowing capacity of firms
C. It helps in transferring risks to others
D. It helps government in influencing macro-economic variables
E. All of the above

35. Which of the following is a characteristic of financial assets?

A. Their physical condition or form determines their market value.
B. They depreciate through use
C. They can easily be substituted for other assets
D. All of the above

36. Which of the following is not true about financial institutions?

A. They pool savings of many small SSUs into large investments.
B. They buy and sell financial claims denominated in various currencies.
C. They are places where financial assets are bought & sold
D. They reduce information costs of screening and monitoring borrowers.

37. A bond investor faces refinancing risk if his or her holding period is
A. Shorter than the maturity of the bond issued.
B. Identical to the maturity of the bond issued.
C. Longer than the maturity of the bond issued.
D. None of the above
38. Intermediaries which link buyers and sellers by buying and selling securities at stated prices
are called
A. hedgers D. dealers
B. finance companies E. none of the above
C. brokers

39. An investor is aware of a tax-free security that offers a yield of 5.6 percent. The investor is in
the 30 percent tax bracket. What is the equivalent before-tax yield necessary to match the
after-tax yield of the tax-exempt security?
A. 5% D. 1.7%
B. 18.7% E. None of the above
C. 8%

40. All of the following are the principal objectives of the Ethiopian Capital Markets Authority
as per Proclamation No.1248/2021 except
A. Protect investors.
 B. Make credit rating services.
C. Reduce systemic risk by ensuring the integrity of the capital market & transactions.
D. Promote the development of the capital market by creating enabling environment for long
term investments.
E. None of the above

41. Of the following securities, which one will most likely have higher interest rate than the
others?
A. Commercial papers C. Callable bonds
B. Non-callable bonds D. Convertible bonds

42. Which of the following is not forbidden in Islamic (interest-free) banking?

A. Speculative activities C. Risk-taking
B. Making money out of money D. Gambling

43. Which of the following could result in an enhancement of the strength of a home currency
against a foreign currency?
A. Increase in domestic inflation D. All of the above
B. Increase in trade deficit E. None of the above
C. Increase in interest rates

44. Which of the following is false?

A. As a bank’s capital increases, its equity multiplier falls.
B. Governments implement their monetary policies using their central banks.
C. Off-balance sheet activities of banks do not involve risks
D. Reserves are funds not loaned out by a private bank but kept as vault cash or as deposit
at the central bank.

45. The former bank of Abyssinia was established in 1905 and owned by
A. National Bank of Ethiopia D. Bank of France
B. National Bank of Egypt E. None of the above
C. Bank of America

46. All of the following are retail banking services except

A. Issue of letter of credit D. Debit and credit cards
B. Mobile banking E. None of the above
C. Foreign currency
47. Under a Salam contract goods are
A. not delivered until payment is made
B. taxed before delivery
C. purchased for delivery in the future
D. delivered for payment later

48. A type of partnership where one party offers funds while the other gives expertise and
management is
A. Murabaha C. Masharaka
B. Ijara D. Mudaraba

49. The conventional financial system focuses primarily on the

A. Ethical and moral aspects of a transaction
B. Ethical aspects of a transaction
C. Socio-religious guidelines
D. Economic and financial aspects of a transaction

50. A “sukuk” is basically a Shariah-compliant

A. loan
B. investment certificate
C. bank check
D. profit

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