Deck 14: Capital Markets

Question 1

Which of the following is not a money market instrument?

A) Treasury bills
B) Commercial paper
C) Bankers' acceptances
D) Corporate bonds

Answer 1

D

Question 2

Which of the following statements is not true with respect to organized securities exchanges?

A) Organized exchanges have a physical location.
B) Exchanges operate as "auction" markets.
C) Stocks traded on exchanges are referred to as unlisted securities.
D) Securities exchanges provide corporations and shareholders increased liquidity for their securities.

Answer 2

C

Question 3

The purpose of secondary trading is to:

A) provide liquidity and competition between investments.
B) provide a market for securities not handled in primary trading.
C) provide jobs for brokers and dealers.
D) provide lower commissions than on the organized exchanges.

Answer 3

A

Question 4

The efficient market hypothesis deals primarily with:

A) random speculation in securities.
B) the degree to which prices adjust to new information.
C) degrees to which price movements are the result of past trends.
D) how an investor can significantly outperform the market in general.

Question 5

Which of the following is not true about the over-the-counter market?

A) The OTC market is a network of dealers connected by phone and computer.
B) There is no central market location.
C) The OTC market is a network of brokers acting as agents for buyers and sellers.
D) The OTC is by far the largest market for bond trading.

Question 6

A relatively new Canadian stock exchange is the:

A) Bourse de Montreal (ME).
B) Canadian Securities Exchange (CSE).
C) S&P/TSX Composite.
D) Canadian Alliance of Traded Securities.

Question 7

In 2008, less than 15 percent of the Canadian Governments debt position was held by non-residents. In 2017 that percentage was:

A) 10 percent
B) 15 percent
C) 20 percent
D) 25 percent

Question 8

Funds generated and retained from ongoing operations are considered:

A) internally generated funds.
B) needed for expansion.
C) externally generated funds.
D) to be part of the capital market.

Question 9

Of the following, which is not a requirement for the initial listing of a stock on the TSX?

A) A total of 1,000,000 freely traded shares.
B) The stock must have traded on one of the smaller exchanges for at least two years.
C) The firm must have net tangible assets of $2 million.
D) There must exist 300 shareholders and earnings of at least $200,000.

Question 10

The bulk of bond trading is generally done:

A) on the TSE.
B) on the regional exchanges.
C) over-the-counter.
D) on the Toronto Bond Exchange.

Question 11

The percentage of world bond market represented by Canadian issues is approximately:

A) 2%.
B) 5%.
C) 10%.
D) 30%.

Question 12

Which of the following users of long-term capital has been the biggest demander of new funds in the last 10 years?

A) Corporations
B) Provincial governments
C) Federal government
D) federal government Crown corporations

Question 13

Compared to the value of trading on the Toronto Stock Market the bond market is:

A) at least 10 times as big.
B) at least 3 times as big.
C) about the same size.
D) about half the size.

Question 14

Security markets are efficient when each of the following exist except:

A) security prices follow the leading indicators such as the S&P/TSX Composite very closely.
B) the markets can absorb large dollar amounts of stock without destabilizing the price.
C) prices adjust rapidly to new information.
D) there is a continuous market where each successive trade is made at a price close to the previous trade.

Question 15

The major supplier of funds for investment in the whole economy is:

A) businesses.
B) households.
C) government.
D) financial institutions.

Question 16

Corporations prefer bonds over preferred stock for financing their operations because:

A) preferred stocks require a dividend.
B) bond interest rates change with the economy while stock dividends remain constant.
C) the after tax cost of debt is less than the cost of preferred stock.
D) bond dividends are typically high yield.

Question 17

Which of the following is not an example of indirect investment by a household?

A) Investment in a mutual fund's shares
B) Investment in an original offering of corporate securities
C) Investment in life insurance
D) Savings deposit in a bank

Question 18

The basic difference between brokers and dealers is that:

A) brokers can trade only on organized exchanges and dealers can trade only over-the-counter.
B) brokers own the securities they trade and dealers act as agent for buyer and seller.
C) dealers own the securities they trade and brokers act as agent for buyer and seller.
D) There is no difference.

Question 19

Which of the following is not a criterion for an efficient market?

A) Prices adjust rapidly to new information.
B) Large dollar amounts of securities can be absorbed without price destabilization.
C) Each successive trade is made at a price close to the previous trade.
D) Computerized handling of transactions.

Question 20

The over-the-counter market:

A) trades mainly stocks of small companies.
B) is made up of brokers buying and selling from their inventories.
C) is a close-knit organization of dealers linked together by computers and a telecommunications network.
D) is limited to high net worth investors.

Question 21

The largest capital market in the world (in terms of dollar value) is located in:

A) New York.
B) London.
C) Toronto.
D) Tokyo.

Question 22

In the capital market, future legislation should pertain to which of the following areas?

A) Gaining competitive advantage.
B) Conflict of interest.
C) Coordinated municipal legislation.
D) Private equity placement.

Question 23

"Preferred Share" funding in Canada is more significant than in the United States due to:

A) trading volumes.
B) weak stock market.
C) size of the federal government's debt.
D) the differences in the tax treatment of corporate dividends.

Question 24

When examining the size and efficiency of financial markets, we want to distinguish between:

A) the number of securities outstanding and the trading activity of the market (a measure of its liquidity).
B) the value of securities outstanding and the number of securities on the market.
C) the number of brokers in the market and the trading activity of the market.
D) the value of securities outstanding and the trading activity of the market.

Question 25

What caused the decrease in asset-backed securities issues between 2001 and 2017?

A) Inefficiency in foreign markets
B) Liquidity demands by shareholders
C) Sale of new derivatives in foreign countries
D) Loss of investor confidence

Question 26

Evidence of market efficiency would include all but which of the following?

A) Large volume of trades.
B) Timely disclosure of financial results.
C) Numerous security analysts.
D) Highly successful trading strategies.

Question 27

The strong form of the efficient market hypothesis states that:

A) past price data is positively correlated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) market efficiency is strongest during an economic upswing.

Question 28

In an efficient market:

A) all financial transactions have an NPV greater than zero.
B) the investor does not receive abnormal returns consistently.
C) the investor is not compensated properly for risk borne.
D) information flow is exclusively through investment dealers.

Question 29

A random walk:

A) suggests patterns from market cycles.
B) allows for abnormal returns.
C) suggests markets are not efficient.
D) suggests non correlation between past and future price movements.

Question 30

Foreign investors have preferred to invest in Canadian bonds due to all but one of the following reasons:

A) Stable efficient markets.
B) Less stringent regulation of securities markets.
C) Political stability of Canada.
D) Strength of the Canadian economy.

Question 31

Which of the following is an internal source of funds?

A) Cash flow from amortization
B) Net loss
C) Repurchase of debt securities
D) Bank loan

Question 32

The accumulated debt of the federal government in 2017 was approximately:

A) $500 billion.
B) $600 billion.
C) $700 billion.
D) 800 billion.

Question 33

Key components of a good, organized exchange include all of the following except that:

A) confidence in corporate governance of listed firms; reliable accounting information; and strict, efficient regulation.
B) ease of buying and selling with significant delays in transaction completion.
C) transparency provided by the widest range of information.
D) competitive bidding process, allowing equal access to information contained in share prices.

Question 34

Financial intermediaries serve which of the following purposes?

A) Financial intermediaries prohibit investment in the capital markets by households.
B) Confirm trades in the primary market.
C) Allocate resources based upon need.
D) Aid in the flow of funds through the economy.

Question 35

The three largest international capital markets are

A) NYSE, NASDAQ OMX, Japan Exchange Group.
B) London SE Group, NYSE, TMX Group.
C) NASDAQ OMX, Hong Kong Exchanges, London SE Group
D) NYSE, TMX Group, NASDAQ OMX

Question 36

Security markets provide liquidity:

A) by allowing corporations to raise funds by selling new issues.
B) by providing the widest range of information to investors.
C) by allowing investors access to low-risk investments.
D) by maintaining confidence in corporate governance of listed firms.

Question 37

The semi-strong form of the efficient market hypothesis states that:

A) past price data is unrelated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) an investor can exploit public information to earn abnormal profits.

Question 38

The efficient market hypothesis has several forms. The weak form states that:

A) past price data is unrelated to future prices.
B) prices reflect all public information.
C) all information both public and private is immediately reflected in stock prices.
D) market efficiency is weakest during an economic downturn.

Question 39

The largest source of new long-term funds for corporations during the last 10 years was:

A) corporate bonds.
B) common stock.
C) predominantly corporate bonds.
D) about equally split between common stock and bonds.

Question 40

Canadian nonfinancial private corporation debt-to-equity ratios have:

A) risen during times of high inflation.
B) risen between 2006 and 2016.
C) caused inflation to rise.
D) risen and fallen inversely to inflation rates.

Question 41

Over-the-counter markets trade:

A) securities that have not met the listing requirements for an exchange.
B) investor information on high quality securities.
C) blue chip securities.
D) private issues to high net worth investors.

Question 42

Financial instruments in the capital markets generally fall under what category in the balance sheet?

A) Short-term liabilities and equities.
B) Near cash assets.
C) Marketable securities.
D) Long-term liabilities and equities.

Question 43

The TSX competes with the NYSE for listings, to reduce the competitive advantage of the highly liquid NYSE,:

A) the TSX has become Canada's sole equity exchange.
B) the TSX has been urging a larger role for dealers acting as principals rather than brokers in stock trading.
C) the TSX eliminated the open cry auction market.
D) the TSX has eliminated "upstairs trading".

Question 44

Which are the benefits of financial intermediaries?

A) Increase market liquidity.
B) Provide a profit for financial institutions.
C) Act as solicitors for the banks.
D) Charge lower transaction fees than banks.

Question 45

Government auctions treasury bills:

A) daily.
B) weekly.
C) biweekly.
D) monthly.

Question 46

Indirect investment:

A) is an investment in a private business.
B) is an investment in a publically traded business.
C) uses government funds to buy shares.
D) uses a financial intermediary who invests funds.

Question 47

The most significant security of the Canadian money market is:

A) government of Canada treasury bills.
B) commercial paper.
C) asset-backed securities.
D) bankers' acceptances.

Question 48

In an efficient market:

A) all financial transactions have an NPV less than zero.
B) the investor receives abnormal returns consistently.
C) the investor is compensated properly for risk borne.
D) prices adjust slowly to new information.

Question 49

Well-functioning capital market include the following attributes except?

A) Liquidity
B) Static prices
C) Competitiveness
D) Transparency

Question 50

Which of the following is not true about the over-the-counter market?

A) The OTC market is a network of dealers connected by phone and computer.
B) There is a central market location.
C) The OTC is by far the largest market for bond trading.
D) Brokers who facilitate trades establish prices.

Question 51

Security markets are efficient when each of the following exist except:

A) there is a continuous market in which each successive trade is made at a price close to the previous price.
B) the markets can absorb large dollar amounts of stock without destabilizing the price.
C) prices adjust rapidly to new information.
D) all of the trades occur between 9:30 am and 4:00 pm. other conditions must exist.

Question 52

Which of the following statements is true with respect to organized securities exchanges?

A) Organized exchanges are an example of a sole proprietorship.
B) Exchanges operate as "auction" markets.
C) Stocks traded on exchanges are referred to as unlisted securities.
D) trades are conducted through insurance brokers who act as agents.

Question 53

When global capital markets collectively react to international events like Enron's collapse, it is common to find:

A) that there is no impact on multinational companies' ability to raise capital.
B) a reduction in capital available to companies with investment grade credit ratings.
C) that multinational firms are so diversified that they are not affected by this event.
D) a reduction in T-bill activity.

Question 54

Alternative trading systems (ATS):

A) include the NYSE.
B) the open pit concept such as at the Chicago Board of Options Exchange (CBOE).
C) are also known as "upstairs" trading floors.
D) electronically match buy and sell orders automatically.

Question 55

Which of the following is not a money market instrument?

A) Treasury bills
B) Government bonds with maturities of less than 3 years
C) Bankers' acceptances
D) Common shares

Question 56

In general when interest rates are expected to rise, financial managers:

A) try to lock in long-term financing at low cost.
B) re-balance the company's debt structure towards more short-term debt.
C) accept more risk.
D) rely more on internal sources of funds rather than external sources.

Question 57

The largest financial intermediary after banks is:

A) insurance companies.
B) mutual funds.
C) pension funds.
D) credit unions.

Question 58

Which of the following is an internal source of funds?

A) Retained earnings
B) Net loss
C) Repurchase of debt securities
D) Bank loan

Question 59

Non-resident holdings of Canadian securities are most significant in:

A) the money market.
B) the stock market.
C) the bond market.
D) the OTC market.

Question 60

The accumulated debt of the federal government and percentage of GDP this represented in 2017 was approximately:

A) $700 billion, 34% of GDP.
B) $600 billion, 32% of GDP.
C) $400 billion, 68% of GDP.
D) $300 billion, 36% of GDP.

Question 61

The over-the-counter market is an informal collection of dealers connected by nationwide telephone, telex, e-mail and computer services.

Question 62

Municipal securities are not a significant component of the capital markets.

Question 63

Canadian regulation of the securities industry is a provincial responsibility, with each province and territory reporting to a single federal securities commission.

Question 64

Resident holdings of Canadian securities are most significant in:

A) the money market.
B) the stock market.
C) the bond market.
D) the OTC market.

Question 65

The capital structure of the firm consists of long-term debt and equity.

Question 66

The efficient market hypothesis is based on the belief that the stock market is in short-run equilibrium.

Question 67

The headquarters for the OTC market is located in Montreal.

Question 68

Often a large issue of debt is followed by a large amount of equity at the next financing in order to keep the debt-to-equity ratio in an appropriate range.

Question 69

In the new issues market for corporate capital, common shares account for the largest percentage of new funds raised.

Question 70

After the market failures as the new century began, further regulations were developed to:

A) hold chief officers of a firm responsible for the accuracy of the financial statements.
B) provide for independent auditors and boards of directors.
C) restrict the accounting activities of audit firms in conflict of interest situations.
D) implement new accounting standards to handle the expensing of stock options, disclosure of off-balance-sheet financial exposures, and the treatment of derivative securities.

Question 71

When an investor buys shares in the stock market, he is purchasing shares from a company.

Question 72

Capital markets consist of securities having maturities greater than one year.

Question 73

A key variable of market efficiency is the certainty of the income stream. The more certain these streams are, the more efficient the market will be.

Question 74

The dealer in the over-the-counter market actually owns the stocks he trades and does not act as a go-between like a member of the TSX or NYSE.

Question 75

The amount of Government of Canada bonds outstanding in foreign currencies during 2000 and 2016 respectively was approximately:

A) $40 and $30 billion.
B) $90 and $140 billion.
C) $150 and $150 billion.
D) $180 and $260 billion.

Question 76

Financial intermediaries channel funds into the capital markets from the household sector.

Question 77

Households and the government are mainly considered to be suppliers of funds while corporations are generally considered users of funds.

Question 78

Upon entering the capital markets an investor might invest in common stocks, preferred stock, negotiable certificates of deposit, and convertible securities.

Question 79

How do Efficient Markets allocate capital?

A) to ensure a positive impact on a companies' ability to create value.
B) to employ capital in social enterprise irrespective of cost.
C) to only maximize CAPM framework.
D) to its best use without undue costs.

Question 80

In a capital intensive economy, a shortage of capital could drive interest rates down and stock prices up.