Chapter 3: Financial Institutions

1. A mutual fund/unit trust is best described as:

A public limited company that invests in a variety of securities and companies. An institutional investor that pools the money of individuals and invests in a range of securities. An institutional investor that invests exclusively in primary market securities. An institutional investor that invests exclusively in foreign capital markets.

2. Which of the following regarding a closed end Investment Trust/Investment Company is FALSE?

The number of shares is fixed unless there is a rights issue or stock split. The shares of the Investment Trust/Investment Company trade on the stock exchange. The price of the shares is always equal to the value of the underlying assets owned by the Investment Trust / Investment Company. They fall under a different legal framework than Mutual Trusts/Unit Trusts.

3. Which one of the following would characterise a key difference between hedge funds and mutual funds?

A hedge fund will tend to publish more about its market positions than a Mutual fund. A hedge fund will tend to be less risky as they hedge their risks. A hedge fund will tend to have more assets under management than a mutual fund. The fee structure for a hedge fund is significantly different than for a mutual fund.

4. Which of the following is NOT a characteristic of a company Pension Fund?

They tend to only invest in bonds since they are less risky than equities. Contributions tend to attract favourable tax concessions. They tend to avoid excessive investments in high risk securities. The assets of a company pension fund are legally separate from company.

5. Which one of the following is a definition of a bank’s “liquidity risk”?

The risk that interest payments on deposits will be greater than its interest rate receipts from loans. The risk that there could be an unexpectedly large withdrawl of short term deposits The risk that a large number of borrowers will fail to repay their loans. The risk that the regulatory authority will enact measures which reduce the bank’s profitability.

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