Financial Markets Liquidity and Risk Quiz

Loans to large businesses are arranged on a case by case basis, with an interest rate partially determined by the risk of the loan.

The lender will generally seek security, though this may be in the form of a covenant or a negative pledge.

Banks make their money through net interest income, which is the difference between the interest they earn on loans and the interest they pay on deposits. Factors that can affect NII include the spread between lending and deposit rates, regulation on liquid assets, changes in interest rates, and shifting customer preferences.

<p>The main sources of funding for banks include retail deposits, financial markets (short-term and long-term debt), securitization, and equity.</p> Signup and view all the answers

<p>The main types of assets that banks hold on their balance sheets include securities, housing loans, and other loans (both household and business loans, both secured and unsecured).</p> Signup and view all the answers

<p>The future value (FV) of a deposit can be calculated using the compound interest formula: $FV = PV(1 + r/n)^{t/n}$, where PV is the present value, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the time in years.</p> Signup and view all the answers

<p>Investors require higher expected returns (risk premium) to compensate for taking on higher levels of risk.</p> Signup and view all the answers

<p>A narrow bid-ask spread indicates high liquidity in the security.</p> Signup and view all the answers

<p>The risk-free rate of return is typically measured by the yield on government bonds, such as 10-year Treasury bonds.</p> Signup and view all the answers

<p>The credit spread is the difference in yields between corporate bonds (e.g., Triple A bonds) and government bonds (e.g., U.S. Treasury bonds). It is used as a measure of the risk premium required for different securities.</p> Signup and view all the answers

<p>As credit worthiness declines, the risk premium required by investors increases.</p> Signup and view all the answers

<p>Market values, risk assessments by rating agencies, and credit spreads can be used to measure the relative riskiness of an investment.</p> Signup and view all the answers

<p>Nominal interest rate = real interest rate + expected inflation rate</p> Signup and view all the answers

<p>Using the AOFM formula and the Australian Financial Market Association’s pricing conventions</p> Signup and view all the answers

<p>Bond yields and the expected inflation rate</p> Signup and view all the answers

<p>The risk-free rate</p> Signup and view all the answers

<p>Changes in expected inflation rate</p> Signup and view all the answers

<p>Decrease due to flight to quality</p> Signup and view all the answers

<p>The price of a bond is the present value of its remaining payments discounted at the current market yield.</p> Signup and view all the answers

<p>Bond prices are quoted per $100 of face value to 3 decimal places.</p> Signup and view all the answers

<p>Bonds settle T+2 with the settlement price calculated using the yield agreed on the trade date.</p> Signup and view all the answers

<p>The price of a bond is inversely related to the current market yield.</p> Signup and view all the answers

<p>Treasury bonds can have a maturity of 1 year or more and are still exposed to interest rate risk.</p> Signup and view all the answers

<p>Yield is a semi-annual compound rate calculated based on the bond's maturity date.</p> Signup and view all the answers

<p>A rate rise is good for prospective investors since it increases the interest return from future investments. However, it is bad for existing investors because it lowers their selling price (due to the inverse relationship between prices and interest rates) if they choose to sell before maturity.</p> Signup and view all the answers

<p>The money market deals with short-term interest rates determined by the Reserve Bank of Australia (RBA), while the bond market deals with long-term interest rates and fixed-income securities.</p> Signup and view all the answers

<p>A spread graph shows the difference between the rates of given investments. In the fixed-income market, it can be used to compare the yields or interest rates of different bonds or other fixed-income securities.</p> Signup and view all the answers

<p>The coupon rate of a bond is dependent on market conditions and cash rates at the time of the bond's issuance. Bonds pay fixed interest/coupon payments and the face value (FV) at maturity.</p> Signup and view all the answers

<p>Government bonds are the most popular bonds bought in Australia due to their low risk and quality. These bonds are considered safer investments for banks and investors, with the majority of Australian bonds rated AAA, AA, and A, which are fairly safe overall.</p> Signup and view all the answers

<p>Financial corporate bonds are issued by banks and other financial institutions, while non-financial corporate bonds are issued by non-bank companies such as Qantas, BHP, and Netflix.</p> Signup and view all the answers