Deck 14: Capital Markets

Question 1

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

Answer 1

True

Question 2

One reason preferred stock has accounted for a significant amount of new funds raised is because of the dividend tax credit.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

Commission rates for stock transactions are fixed as a result of legislative changes in the 1980s.

Question 8

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

Question 9

The weak form of the efficient market hypothesis states that an investor can profit by using past price data.

Question 10

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

Question 11

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

Question 12

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

Question 13

Utility companies rely heavily upon common stock as a means of financing their growth mainly to maintain their debt-to-equity ratio.

Question 14

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

Question 15

The strong form of the efficient market hypothesis states that prices reflect all information available to the public.

Question 16

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

Question 17

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

Question 18

The efficient market hypothesis is generally concerned with the impact of information on the behaviour of stock prices.

Question 19

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 20

The headquarters for the OTC market is located in Montreal.

Question 21

Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large dollar trades can be absorbed without large price movements.

Question 22

Without financial intermediaries the cost of funds would be about the same as with financial intermediaries.

Question 23

The OTC market is a key market for international securities.

Question 24

Brokers actually own the securities they buy and sell on the floor of the exchange.

Question 25

The NASDAQ National Market is composed of large nation-wide companies that are traded in the over-the-counter market.

Question 26

Corporations tend to shift from debt financing to equity financing during bull markets.

Question 27

Capital markets are becoming increasingly international as investors and issuers seek out the best risk-return opportunities.

Question 28

In the corporate securities market, the proportion of bond financing to equity financing is primarily influenced by the level of interest rates.

Question 29

Brokers on an organized stock exchange act as an agent for the person buying or selling securities.

Question 30

There are more companies traded over-the-counter than on the Toronto Stock Exchange (TSX).

Question 31

The average maturity on Government of Canada debt is over 6 years.

Question 32

Corporate securities represent about 60% of the total long-term securities issued by all long-term issuers.

Question 33

Over the last decade, long-term federal government securities outstanding have grown at a faster rate than corporate debt securities outstanding.

Question 34

The TSX lists approximately 1,600 companies.

Question 35

Due to a lack of certainty concerning their income stream, fixed-income securities trade in relatively inefficient markets.

Question 36

Many OTC dealers make markets in the same security.

Question 37

The bulk of Canadian government securities are traded on the Toronto Stock Exchange.

Question 38

Provincial and municipal governments account for approximately the same percentage of bond securities outstanding as the federal government.

Question 39

Due to recent Canadian economic prosperity, Canadian governments and corporations total financings in foreign currencies have decreased.

Question 40

In the last number of years, Canada's net international debt position has been improving.

Question 41

Federal government agency issues, though backed directly by the federal government, are deemed substantially more risky than regular government issues.

Question 42

The chartered banks are the dominant financial institutions within Canada.

Question 43

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 44

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

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

Question 45

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

Question 46

The stock market far exceeds the bond market in terms of size of new capital raised.

Question 47

Before the mid 1990s the last federal budget surplus was in

A) 1967.
B) 1973.
C) 1987.
D) 1995.

Question 48

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 49

The European Central Bank issues bonds, notes, and bills denominated in the new Euro currency.

Question 50

Amortization represents the majority of internally generated corporate funds.

Question 51

The European Monetary Union (EMU) includes Britain, Germany, France, Italy, and seven other European countries.

Question 52

The Canadian government recently has reduced its percentage of debt held outside Canada.

Question 53

Companies have relied on external funding because of

A) reaction to the economy.
B) need for expansion.
C) change in cost of capital.
D) all of the other answers are correct

Question 54

The increase in retained earnings during recent economic expansions caused a dramatic reduction in the need for external funds.

Question 55

During the past 20 years, corporate bonds have accounted for approximately 85% of all long-term corporate securities issued.

Question 56

Common stock in the 1990s accounted for an insignificant proportion of long-term funds issued.

Question 57

Canadian banks are significant players in the investment dealing industry.

Question 58

The Euro is the only official currency in the Euro-zone, has liquidity and size second only to the U.S. dollar.

Question 59

Internal funds generated by corporations include retained earnings and non cash expenses such as amortization and deferred taxes.

Question 60

The capital markets serve as a way of allocating available capital to the most efficient user.

Question 61

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 62

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 63

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 64

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

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

Question 65

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 66

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) all of the other answers are correct

Question 67

Which of the following is not a money market instrument?

A) Treasury bills
B) commercial paper
C) bankers' acceptances
D) corporate bonds

Question 68

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) none of the other answers are correct

Question 69

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 70

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 71

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 aftertax cost of debt is less than the cost of preferred stock.
D) none of the other answers are correct.

Question 72

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) none of the other answers are correct

Question 73

The most important capital market in the world (in terms of dollar value) is located in

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

Question 74

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 75

Security markets provide liquidity

A) by allowing corporations to raise funds by selling new issues.
B) by creating a market in which owners may easily turn an investment into cash through its sale.
C) by allowing investors access to low-risk investments.
D) two of the other answers are correct

Question 76

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 77

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.

Question 78

A relatively new Canadian stock exchange is the

A) Bourse de Montreal (ME).
B) Canadian Trading and Quotation System (CNQ).
C) S&P/TSX Composite.
D) Canadian Alliance of Traded Securities.

Question 79

Financial intermediaries serve which of the following purposes?

A) financial intermediaries allow for indirect investment in the capital markets by households
B) aid in the flow of funds through the economy
C) help provide allocation of funds to the best investments
D) all of the other answers are correct

Question 80

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.