2019 - February

Question 1

A period of negative savings where income does not meet the required level of expenditures could also be regarded as a(n):

a) Negative gearing.
b) Operating deficit.
c) Overdraft.

Question 2

The family car would appear where on the family’s private balance sheet, if they prepare one?

a) Equity.
b) Fixed assets.
c) Assets neither fixed nor current.

Question 3

Which of the following is generally true about the calculation of an individual’s equity or net worth ratio?

a) For a young person or couple, it is expected that their equity ratio would be relatively low as they are likely to have a relatively high level of debt.
b) For a young person or couple, it is expected that their equity ratio would be relatively high as they are likely to have a relatively low level of debt.
c) For anyone at all, the ratio shows the percentage of net equity to gross assets.

Question 4

Cash investments provide:

a) A capital guarantee.
b) Returns that fully offset the investor from the impacts of inflation.
c) Income, liquidity and stable returns.

Question 5

Market forces are the primary determinant of share prices in the secondary market with price increases arising from:

a) Excess levels of buying pressure over selling pressure.
b) Excess levels of selling pressure over buying pressure.
c) More buyers than sellers active at the time.

Question 6

The aggressive investor is characterised by?

a) Speculative gambling and excessive debt levels.
b) Willingness to take bigger risks in the hope of getting bigger returns than the average investor.
c) Hostile takeover bids.

Question 7

All forms of debt from credit cards to mortgages on property and margins with brokers have the common characteristic:

a) They all carry bankruptcy risk and interest costs.
b) They all enable expenditure beyond the borrower’s income to occur systematically.
c) They all increase the risk of insolvency.

Question 8

A normal investor is usually presumed to be?

a) Risk neutral.
b) Entrepreneurial and willing to take a gamble.
c) Risk averse.

Question 9

The relationship between nominal rates and real rates of return on investments in shares in times of rising inflationary levels results in:

a) Real rates exceeding nominal rates of return.
b) Nominal rates exceeding real rates of return.
c) Both nominal and real rates of return being equal.

Question 10

The yield curve typically

a) has a shape which always slopes downward to the right.
b) is a graph of interest rates relative to all aspects of their risk.
c) may be flat when short-term and long-term rates are virtually the same, and a humped yield curve may occur when medium-term rates are higher.

Question 11

Taking a fixed rate rather than a variable rate mortgage carries the risk that

a) actual rates in future will be more volatile.
b) actual rates in future rise above the fixed rate.
c) when the fixed rate period ends, the variable rate which succeeds it may be unaffordable.

Question 12

When considering buying funeral insurance it is important to calculate

a) the payback period when the cumulative cost of the insurance begins to exceed the cost of the funeral itself.
b) the probability that funeral costs will increase at a faster rate than the rate of increase, if any, in the premiums.
c) the relative size of the commission that the salesperson will make from your insurance relative to that taken by companies with whom s/he is in competition.

Question 13

A defined benefit pension or superannuation fund is one in which

a) the final earnings of the beneficiary are a major factor determining the size of the regular super payout after retirement.
b) the exact amount the beneficiary is to receive on retirement is defined exactly.
c) the present pay of the beneficiary determines the retirement payout precisely.

Question 14

Where the value of secured assets falls below an agreed debt-to-asset ratio for a margin loan, what action must be taken?

a) The lender must make a margin call on the loan.
b) The borrower must meet a margin call on the loan.
c) The lender must call in the whole margin loan.

Question 15

Negative gearing on property investments are investments for which

a) the interest outflows exceed the rental inflows.
b) the tax shield effect converts net operating losses into profits.
c) the capital value of the property is below the borrowed amount financing it.

Question 16

In a perfectly efficient capital market, risk that cannot be eliminated by diversification

a) does not exist at all.
b) is accurately rewarded in the market through prices varying to cause returns to reflect the systematic risks.
c) can be eliminated through reinsurance.

Question 17

In insurance, moral hazard is said to exist insofar as

a) people may make fraudulent claims on their insurance policies.
b) the insurance sales force have information advantage over the buyers.
c) the existence of insurance makes the holder less averse to taking risks with the insured items.

Question 18

Simon bought put options on 5000 $2 shares in STL for 40cents each. The price of the shares on the open market was then $4.50 but has since fallen to $3.50. The option expires in 4 more weeks and the price is beginning to rise again. Simon’s best tactic now is?

a) Exercise the option.
b) Keep the option longer and buy some shares.
c) Buy a call option to balance.

Question 19

A bank overdraft is?

a) Any bank loan where there is a loan facility rather than a fixed lent sum.
b) A bank loan facility repayable immediately on demand from the bank.
c) A sign of financial recklessness on the part of the individual who has incurred it.

Question 20

An investment’s internal rate of return tells us

a) the net present value as a percentage of the initial investment.
b) the optimal cost of capital or discount rate.
c) the maximum cost of capital beyond which the project becomes unattractive on account of having a negative NPV.

Question 21

Explain the factors that should influence how you decide how much debt you should get into relative to any kind of investment from your degree course through to your shares and real estate?

Question 22

Under what circumstances would investment in bonds and other fixed interest securities provide a better return per unit of risk than an investment in a portfolio of shares?

Question 23

a) Advise a rich unmarried single man in his early twenties with a million dollars to spend how he should decide to allocate his money between the main investment categories.
b) How would you vary your answer if the man told you he had terminal stage four cancer and had only two years’ more life maximum?

Question 24

What questions should you have in mind when reviewing the performance of your own or your possible client’s superannuation fund and what would constitute satisfactory answers to your questions?

When would it be sensible to change funds altogether?

Question 25

a) What makes a risk insurable?
b) In what way if at all is death an insurable risk?
c) What factors should affect how much whole life insurance you take out on your own life?

Question 26

Show all your workings in answering the following calculation question.

a) Calculate the NPV of an investment requiring an initial outlay of $10,000 at a cost of capital of 6% which provides end-of-year cash inflows of:

year 1 $3,000; year 2 $11,000; and year 4 $7,000; but in year 3 there would be a net outflow of $1,500 and this is a real outflow, not a net negative inflow.

Show all workings.

b) If the inflows are each only 80% probable and the probability of no inflow at all is 20%, what then is the NPV?
c) If the first day of the project is 1st January, what is the date when the payback period finishes?
d) What does the NPV represent for the shareholders in the firm making the investment, if the stock market is strong-form efficient?