Deck 12: The Global Capital Market

Question 1

Systematic risk refers to the movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy.

Answer 1

True
Explanation: Systematic risk refers to movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy, rather than factors specific to an individual firm.

Question 2

Global capital market often lack information about the fundamental quality of foreign investments.

Answer 2

True
Explanation: A lack of information about the fundamental quality of foreign investments may encourage speculative flows in the global capital market. Faced with a lack of quality information, investors may react to dramatic news events in foreign nations and pull their money out too quickly.

Question 3

An integrated international capital market is less volatile compared to a nonintegrated market.

Answer 3

False
Explanation: The integration facilitated in the global capital markets cause shocks that occur in one financial center now spread around the globe very quickly. This makes the global markets highly volatile.

Question 4

The cost of capital is higher in a global market than in a purely domestic capital market.

Question 5

Hedge funds position themselves to make "long bets" on assets that they think will increase in value.

Question 6

Financial services is an information-intensive industry.

Question 7

The cost of capital is the difference between cost of inputs and outputs.

Question 8

The risk associated with a portfolio increases as the investor increases the number of stocks in her portfolio.

Question 9

Investors can reduce the level of risk by diversifying a portfolio internationally.

Question 10

Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors.

Question 11

By using the global capital market,investors have a much wider range of investment opportunities than in a purely domestic capital market.

Question 12

The liquidity of the market is limited in a purely domestic capital market.

Question 13

Market makers are companies that make large investments in governmental bonds.

Question 14

A capital market brings together those who want to invest money and those who want to borrow money.

Question 15

The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions.

Question 16

The systematic risk is the level of diversifiable risk in an economy.

Question 17

Using floating exchange rates will help countries reduce the risk of investing in foreign assets.

Question 18

A debt loan requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

Question 19

An investor purchases the right to receive a specified fixed stream of income from the corporation when he purchases a share of stock.

Question 20

Commercial banks perform a direct connection function in capital markets.

Question 21

A Eurocurrency is the currency used by the countries of the European Union.

Question 22

Eurocurrency market is characterized by lack of government regulation.

Question 23

Companies receive a higher interest rate on deposits and pay less for loans when using the Eurocurrency market.

Question 24

Investors who purchase a fixed-rate bond receive cash payoffs only at maturity.

Question 25

Eurocurrency can be created anywhere in the world.

Question 26

Eurobonds fall within the regulatory domain of European Economic Community.

Question 27

Governments give banks less freedom when they deal in foreign currencies.

Question 28

The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates.

Question 29

Borrowers can hedge against foreign exchange risks by entering into a forward contract.

Question 30

Eurobonds are normally underwritten by an international syndicate of banks.

Question 31

Government limitations are more severe for securities denominated in foreign currencies than for domestic securities.

Question 32

A factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.

Question 33

Foreign bonds sold in the United States are called bulldogs.

Question 34

Eurobonds are usually offered to residents of the country in whose currency they are denominated.

Question 35

A Chinese firm borrows 1 million U.S.dollars from an American bank.The cost of this loan will be less if U.S.dollar appreciates against the Chinese currency.

Question 36

Domestic currency deposits are regulated in most industrialized countries.

Question 37

Historically substantial regulatory barriers separated national equity markets from each other.

Question 38

Foreign bonds are sold within the borrower's country and are denominated in the currency of the country in which they are issued.

Question 39

Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency.

Question 40

Depositors are not protected against bank failures in the Eurocurrency market.

Question 41

A _____ brings together those who want to invest money and those who want to borrow money.

A) consumer market
B) value chain
C) supply chain
D) capital market

Question 42

When an investor purchases a corporate bond,he purchases the right to receive a _____.

A) share of the overall revenues that the company generates
B) part of the title for the assets that the corporate holds
C) specified fixed stream of income from the corporation
D) share of the profits that the company generates through operations

Question 43

Market makers are _____.

A) financial service companies that connect investors and borrowers
B) nonbank financial institutions who want to invest money
C) high net worth individuals with surplus cash to reinvest
D) those who want to borrow money including individuals, companies, and governments

Question 44

Which of the following is a reason why the global capital market is increasingly becoming speculative?

A) A global market reduces the liquidity of investments and increases the chances of incurring losses.
B) Investments in the global capital market are faced with a lack of quality information.
C) Investments in the global capital market are not conducive to diversification.
D) The cost of capital is more in a global market and this increases the level of risk associated with it.

Question 45

The element of risk into investing in foreign assets is more with _____ exchange rates.

A) floating
B) pegged
C) fixed
D) managed

Question 46

Which of the following statements is true of the use of information technology in financial services?

A) Information technology prevents the spread of financial crises.
B) Financial services is an information-intensive industry.
C) Financial services do not use decisions making systems.
D) It does not require to process large volumes of information.

Question 47

Analysts who believe globalization of capital has serious risks argue that _____.

A) capital does not shift in and out of countries as quickly as conditions change
B) individual nations are becoming more vulnerable to speculative capital
C) deregulation of trade is helpful for the economic growth in a country
D) most of the capital that moves internationally is pursuing long term gains

Question 48

The cost of capital is the _____.

A) interest received on investments made by the company
B) price of borrowing money
C) difference between cost of inputs and outputs
D) total value of raw materials that a company uses

Question 49

Which of the following statements is true of market makers?

A) Commercial banks are not allowed function as market makers.
B) Market makers are large investors who drive an economy.
C) Market makers facilitate only equity based loans.
D) Market makers connect investors and borrowers in a capital market.

Question 50

Systematic risk refers to movements in a stock portfolio's value that are _____.

A) attributable to macroeconomic forces affecting an economy
B) specific to the firm or individuals who invest in a portfolio
C) attributable to factors pertaining to an individual firm
D) specific to the company that facilitates the investment portfolio

Question 51

A purely domestic capital market faces the problem of _____.

A) foreign exchange risk
B) limited liquidity
C) lack of regulation
D) deregulated markets

Question 52

Which of the following statements is true of debt loans?

A) Management has the discretion in paying the amount to investors.
B) Debt loans should be repaid at regular intervals.
C) Returns from debt loans are variable in nature.
D) Corporations need not pay back the debt loans if they incur losses.

Question 53

The relatively low correlation between the movement of stock markets in different countries indicates that _____.

A) diversifying a portfolio will increase the risk of investing
B) most countries face similar economic conditions
C) countries pursue different macroeconomic policies
D) different stock markets are not segmented from each other

Question 54

Which of the following statements is true of the deregulation of financial industry?

A) Countries can strengthen the global capital market by encouraging strict regulations.
B) Financial services have historically been the most deregulated of all industries.
C) Deregulation helped the development of an international capital market.
D) Deregulation compels financial services companies to remain as domestic companies.

Question 55

Which of the following is a disadvantage of the integration facilitated by technology?

A) Segregated international capital markets will emerge as a result of technology.
B) Complexity in processing large volumes of data will increase.
C) Shocks that occur in one financial center will spread globally.
D) Systems integration hinders real-time data transfer across different countries.

Question 56

As investors increase the number of stocks in their portfolio,the portfolio's risk _____.

A) increases initially and declines later
B) declines slowly and steadily
C) increases exponentially beyond a point
D) declines rapidly in the beginning

Question 57

Hedge funds _____.

A) are public investment funds that invest in corporate bonds and shares
B) make long bets rather than short bets
C) are investment funds managed by the government
D) make short bets on assets that they think will decline in value

Question 58

An equity loan is made when _____.

A) a corporation pledge equities or other assets to borrow money
B) corporations avail cash loans from individuals
C) a corporation sells stock to investors
D) corporations issue bonds to individual investors

Question 59

An important drawback of a purely domestic capital market is that the _____.

A) investments does not receive protection from governments
B) investments are riskier than in global capital markets
C) market lacks a strong regulatory mechanism
D) cost of capital tends to be higher than it is in a global market

Question 60

Which of the following is a disadvantage of global capital market?

A) Foreign investments may be driven by speculative flows in the market.
B) A truly global market reduces the liquidity of investments.
C) The availability of capital is low in a global capital market.
D) The cost of capital is more in a global market than a domestic market.

Question 61

Eurobonds are _____.

A) denominated in the currency of the country in which they are issued
B) normally underwritten by an international syndicate of banks
C) denominated in a currency that is accepted by the European Union
D) are sold outside the borrower's county with reference to the originating currency

Question 62

ABB Bank is a financial corporation located in England and uses euro as its official currency.The company borrows 1 million U.S.dollars from a bank based in United States.ABB will be at a disadvantage if _____.

A) Euro appreciates against all currencies
B) U.S. dollar appreciates against Euro
C) U.S. dollar depreciates against Euro
D) fixed exchange rates are used for the transaction

Question 63

The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is that it _____.

A) is separated from the foreign exchange market
B) lacks government regulation
C) is associated with low-risk
D) gives high levels of investor protection

Question 64

Which of the following statements is true of foreign bonds?

A) Such bonds must be underwritten by an international syndicate of banks.
B) Foreign bonds are placed only in the originating country.
C) Foreign bonds are issued by governments rather than corporations.
D) Such bonds are denominated in the issuing country's currency.

Question 65

United States sells bonds that are denominated in dollars in Europe.This is an example of a _____ bond.

A) foreign
B) Euro
C) micro
D) regulatory

Question 66

Eurodollars _____.

A) refer to the exchange value of dollar with Euro
B) are used to pay for imports from Europe
C) are dollars banked outside of the United States
D) refer to the exchange buffer that Euro has against dollar

Question 67

A Eurocurrency is any currency _____.

A) banked outside of its country of origin
B) that is traded in European countries
C) that originates in European countries
D) used to buy gold and related commodities

Question 68

Which of the following statements is true of Eurocurrency?

A) Eurocurrency market is a relatively high-cost source of funds.
B) It is produced and banked within European countries.
C) Eurocurrency can be created anywhere in the world.
D) It is used only for internal transactions within European Union.

Question 69

_____ can inject risk into foreign currency borrowing.

A) Movements in exchange rates
B) Use of fixed-exchange rates
C) Issue of domestic bonds
D) Use of pegged exchange rates

Question 70

When value of U.S.dollars goes down,_____.

A) bonds that are denominated in dollar will produce more returns
B) foreign depositors in the U.S will benefit
C) foreign borrowers will garner benefits
D) investors tend to favor bonds that are denominated in dollar

Question 71

_____ are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued.

A) Micro bonds
B) Eurobonds
C) Foreign bonds
D) Regulatory bonds

Question 72

Which of the following is a drawback of the Eurocurrency market?

A) Increased governmental controls
B) High reserve ratio requirements
C) Low interest rates on deposits
D) Exposure to foreign exchange risk

Question 73

Banks offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency because Eurocurrency deposits _____.

A) are funded by the European union
B) lack government regulations
C) are associated with low risk
D) have minimum foreign exchange risk

Question 74

Which of the following is an advantage that banks have when they deal with foreign currencies?

A) Interest payments to customers are low when dealing with foreign currencies.
B) Accounts need not be maintained when dealing with foreign currencies.
C) Risks that investors face are low when dealing with foreign currencies.
D) Governments give banks more freedom when dealing with foreign currencies.

Question 75

When using the Euromarkets,companies _____.

A) have funds that lack liquidity
B) pay less for the loans
C) attract low interest rates
D) are secured from foreign exchange risks

Question 76

Which of the following is a factor that makes Eurobonds more attractive than most major domestic bonds?

A) Presence of a regulatory interference
B) Strong disclosure requirements
C) Favorable tax status
D) Protection from exchange risks

Question 77

An Italian corporation issues a bond denominated in dollars.This is an example of a _____.

A) foreign bond
B) Eurobond
C) micro bond
D) regulatory bond

Question 78

_____ are international bonds,normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated.

A) Micro bonds
B) Foreign bonds
C) Eurobonds
D) Regulatory bonds

Question 79

Which of the following is true of fixed-rate bonds?

A) Returns from fixed-rate bonds are dependent on the profitability of the issuing company.
B) Investors get back the face value of the bond at maturity of fixed-rate bonds.
C) Fixed-rate bonds issue cash payoffs only at maturity of fixed-rate bonds.
D) Investors get a share of the company's profit when using fixed-rate bonds.

Question 80

_____ separated national equity markets from each other historically.

A) Substantial regulatory barriers
B) Fixed exchange rates
C) Financial similarities
D) Desire for high levels of profit