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Unformatted text preview: risk averse. Risk aversion does not mean that a person will refuse to accept risk. It does
mean that a person will take on risk only if it is accompanied by compensation, usually in the form of a higher
expected return. Only D is consistent with these assumptions. See page 7. 3
Which of the following is not an important function of an efficient financial system?
providing a wide range of financial instruments with characteristics that suit the needs of investors
B) providing economic and financial information to market participants
C) facilitating economic growth by encouraging savings
D) allowing companies to produce goods
Feedback: When a company provides goods or services and services regardless of the profits and therefore its and
that are in high demand, its demand for these goods
s hare price will be higher than otherwise. The higher share price and positive outlook will make it easier for the
company to raise more capital and invest to increase its output. Thus the statement in D is not applicable to an
efficient financial system, making it the correct answer. See page 8. 4
Debt may be either secured or unsecured. Which of the following is correct?
A) secured debt is debt that can be traded in the capital market
the promise that secured debt will be repaid is supported by a claim over specified assets
Feedback: Secured debt is less risky for risky for the lender than unsecured debt the borrower’s promise to repay
C) secured debt is more lenders than unsecured debt because
the loan is supported by a claim over certain assets or a guarantee from a third party. This means that if the
D) the risks of secured and unsecured have been pledged as security and sell them. Secured
borrower defaults the lender can seize the assets thatdebt are essentially the same
debt may be marketable but this is not necessarily the case. In summary, A, C and D are incorrect and B is the
only correct answer. See page 13. 5
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This note was uploaded on 03/26/2012 for the course FIN 1612 at University of New South Wales.