Exam questions 2016
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Macquarie University *
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Course
3059
Subject
Finance
Date
Apr 27, 2024
Type
docx
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11
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Question 1 [13 marks]
The 2014 Financial System Inquiry suggested that the three main criteria for a well-
functioning financial system are efficiency
, resilience
and fairness
.
a)
In relation to Australia’s banks, what do you think is meant by “
efficiency”
?
[3 marks]
b)
Australian bank loans to customers are mostly secured by mortgage over real property such as houses and apartments. For these loans why is there a concern about “
resilience
”?
[3 marks] c)
How can a mutual bank, that is, a bank without shareholders, demonstrate that it is “
resilient
”?
[2 marks]
d)
The Reserve Bank sets short term interest rates in Australia. Sometimes when the Reserve Bank reduces interest rates the banks do not “pass through” the full reduction to the interest rates they charge to their mortgage customers. Some commentators have described this as “
unfair
”. Do you agree? Explain your answer with reasons.
[5 marks]
Answer
a) Efficient
Australian banks borrow from customers and make loans to other customers
This process should be as simple and cost-efficient as possible
Cost efficiency relates to the costs of the banks and the costs to customers in dealing with the banks
Competition between banks can help to improve efficiency
Loans should be allocated to customers who use the funds for the greatest
economic benefit for Australia
Australia is a net importer of capital. Efficiency means that the banks have ready access to overseas funding on attractive terms
b) Resilience
One risk to banks is that individual customers may default on their loan repayments
This can be managed by good loan underwriting, capping LVRs and insurance for customers with high LVRs. And the bank has the security of the asset
The main resilience risk is a systemic issue, e.g. economic recession, that leads to increased loan defaults at a time of falling property prices
Best defence here is a strong capital position to absorb the losses
and
allow the banks to continue operating
A strong capital position should also allow the banks to be able to continue
raising funds (including from overseas) to continue making loans
even during the difficult economic conditions c)
Mutual banks
Shareholder banks raise capital from shareholders and price their products
to generate a return on capital for their shareholders
Mutual companies meet capital requirements through building retained earnings. Customers are charged for a contribution to the build-up of retained earnings as the business grows over time.
d)
Fairness – passing through interest rate reductions
Bank lending rates are dependent on their borrowing rates which depend on their funding sources – see slide below
Funding from Australian sources should relate to the RBA interest rates
But wholesale funding from overseas does not link directly to RBA
Banks need to consider borrowing rates as well as lending rates
In setting mortgage interest rates there are considerations other than funding costs – see slide below
Perceptions of fairness might be enhanced by more transparent disclosures from banks
Question 2 [13 marks]
a)
Describe the main methods / channels used by life insurance companies and general insurance companies to distribute their products to customers.
[5 marks]
The main channels for life insurance is: Shareholders, LI company, Regulator, Financial planners, Super funds. The main channels for General Insurance is:
Shareholders, Regulators, Brokers. For domestic general insurance individual can buy directly from the company through phone, website or in office. For business related insurance, it is sold by broker who advise on the needs for the company.
For life insurance, super funds provide a basic level of insurance through group insurance. Mostly it is sold by financial regulators who provide needs and advise that
align to the customer needs. LI can also be bought directly from the company.
b)
For each of the distribution methods / channels you identified in part (a) indicate the size of the distribution costs incurred by the insurance companies and briefly explain the reasons for any differences. [5 marks] -
Need to pay heavy commissions for financial planners. 60% of premium in year 1 and 20% of later premiums -
It is a heavily regulated process with claims cost, analysis and SOA which requires a lot of initial cost c)
Reinsurance companies often pay a reinsurance commission to the direct insurance company on the business reinsured. Explain how reinsurance commission works.
[3 marks]
Answer
a)
Distribution channels
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Related Questions
QUESTION 4
Which of the following statements is NOT true?
A.
Relative to other US industries, there are a large number of small banks.
B.
The US banking industry is less competitive than the banking sectors in other advanced economies.
C.
The banking sectors in Canada and the UK are dominated by a few large banks.
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Q (B)
Which of the following statements about central bank objectives are true?
A.
Central banks can have several objectives, but their actions need to provide a “nominal anchor” for the economy
B.
All statements are true
C.
A strict inflation target is a way to provide a “nominal anchor” for the economy
D.
In principle, one of the goals of a central bank could be to slow down climate change
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part-a: What is the difference between direct finance and indirect finance?
part-b: What are the main institutions in the direct finance system of an economy? What are the main institutions that constitute the indirect finance system in a country?
part-c: What are the sources of national saving in a closed economy? Does a government increasing taxes and / or social security transfers impact the amount of national savings in a closed economy? Why or why not? (Hint: Consider the savings identity for this question.)
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Question 1
(ILOs: A1, A2, B1, C1, C2, D1, D4)
a. Some countries do not have well-established market for
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expansion, and growth in national income in these
countries?
b. When economic crises in countries are due to a weak
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Point out a mistake in this sentence,
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1. A. Identify and explain the functions of financial intermediation.
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Question 2
a. Why municipal bonds are the priority of some investors? Why sometimes do investors avoid them?
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1. How has deregulation of the financial services industry affected the makeup offinancial intermediaries? How do you think intermediaries’ characteristics willchange in the future?
2. How do banking organizations in the United States differ from banking organizationsin other countries? Why are they different?
3. How is money created in a banking system that has fractional reserve requirements(i.e., a fractional reserve system)?
4. Describe the open market operations undertaken by the Federal Reserve. Whattype of trades would the Fed make if it wanted to increase interest rates?
5. How would funds—that is, the money supply—in the United States be affectedif the Federal Reserve increases reserve requirements? Give an example.
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6.
How does the deposit insurance help the depositors? What are the pitfalls of the scheme? Can it help
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a. “Financial intermediaries play a crucial role in an economic crisis–they are responsible for both causing the market to crash and then helping it recover from the crisis.” Is this statement true? Discuss with an example. b. Discuss the role of banks as financial institutions that fuel the economic growth of a nation.
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3. Consider the monetary neutrality. Suppose that the central bank changed the money supply. According to economists’ assumption on monetary neutrality, could the change affect the employment in the short-run? How about in the long-run? Short-run: Long-run:
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a. “A robust financial market is one of the pillars of stable economic growth and securedfinancial sustainability for the future.” Discuss.
b. Why do managers of financial institutions care so much about the activities of the Central Bank?
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