Deck 14: Capital Markets

Question 1

Federal government agency issues, though backed directly by the U.S. Treasury, are deemed substantially more risky than regular government issues.
The government does not "directly" back the debts of these agencies, thereby increasing their risk slightly over U.S. securities.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

U.S. government agency securities are directly guaranteed by the full faith and credit of the U.S. Treasury.

Question 5

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

Question 6

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

Question 7

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

Question 8

The European Central Bank that was created with the European Monetary Union has no control over monetary policy but is responsible for clearing transactions between the countries.

Question 9

In the last decade, the Chinese have invested in U.S. securities and real assets.

Question 10

The euro is the only official currency in the Eurozone. It has a liquidity and size second only to the U.S. dollar.

Question 11

Interest rates have stayed relatively low during the 2012-2015 time frame, so more and more companies have taken on long-term debt rather than short-term debt.

Question 12

Municipal securities are called "tax-exempt" because no federal taxes must be paid on interest received.

Question 13

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

Question 14

The dollar value of common stock issuances exceeds the level of preferred stock issuances and corporate bond issuances.

Question 15

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

Question 16

Short-term markets that comprise securities with maturities of less than one month are referred to as money markets.
By definition, "money markets" comprise securities with maturities of one year or less.

Question 17

Money markets are the simplest form of capital markets because they involve trading in U.S. dollars.
By definition, "money markets" comprise securities with maturities of one year or less.

Question 18

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

Question 19

Upon entering the capital markets, an investor might invest in common stocks, preferred stock, negotiable certificates of deposit, and convertible securities.
Short-term negotiable CDs would be instruments of the money market.

Question 20

The European Union (EU) includes Britain, Germany, France, Italy, and seven other European countries.
As of 2013, the EU currently has 28 member nations.

Question 21

Regional exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.

Question 22

The NASDAQ market is the primary market for international securities.

Question 23

NASD regulates stockbrokers and brokerage firms.

Question 24

The major suppliers of funds to the U.S. credit markets are foreign suppliers, mutual funds, and federal, state, and local governments.
In this case, the governments are not direct suppliers of funds into the U.S. credit markets.

Question 25

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

Question 26

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

Question 27

The highest suppliers of funds to the U.S. credit markets are foreign investors.

Question 28

Retained earnings account for the majority of internally generated corporate funds.
On average, less than half of U.S. corporations' funding come from retained earnings, rather than the issuance of new securities.

Question 29

As corporate bonds mature and become due for payment, it's common for the borrowing corporation to replace this debt with the issuance of new bonds.

Question 30

When an investor buys stock in the stock market, he is purchasing shares from a company.
Investors purchase shares from the company only in the initial offering.

Question 31

The main reason for the small amount of financing with preferred stock is that dividends on preferred stock are not tax deductible, as is the interest paid on bonds.

Question 32

Financial intermediaries help eliminate inefficiencies such as indirect investment by households.
While intermediaries do reduce inefficiencies, indirect investment by households is not an inefficiency.

Question 33

Internal funds generated by corporations include retained earnings and non-cash expenses such as depreciation.

Question 34

The NASDAQ Small-Cap Market is composed of smaller regionally based companies that often remain controlled by their founders so that fewer shares are available to the public.

Question 35

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

Question 36

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

Question 37

Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively.
Both are referred to collectively as "municipal securities" in general, or in this case, "municipal bonds."

Question 38

The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities.
The acquisition was actually to bring electronic trading capabilities and expertise as a complement to the NYSE's established floor-trading skills.

Question 39

A key variable of market efficiency is the certainty of the income stream. The most efficient market is for corporate securities.
The most efficient market is for U.S. securities, particularly the short-term U.S. Treasury Bill.

Question 40

Brokers actually own the securities they buy and sell on the floor of the exchange.
While "brokers" in general act as agents for buyers and sellers, those who actually take title to and maintain inventories of shares are referred to as "specialists," "dealers," or more recently, "designated market-makers."

Question 41

All of these are recognized as important influences in the development of the banking crisis of 2008 and the resulting credit crisis EXCEPT

A) Consumers, especially homeowners, took on too much debt.
B) Too many subprime loans were repackaged and sold as securities.
C) The U.S. government promised to buy unlimited amounts of debt from FHLB.
D) Real estate prices collapsed.

Question 42

Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.
This Act prohibited fixed commissions, in an attempt to foster competition, leading to fairer prices for such services.

Question 43

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 44

The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from fraudulent activities.
SOX is a preventive measure, but it does not provide complete assurance against fraud.

Question 45

The market for U.S. government securities is the most efficient in the world.

Question 46

The Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities.

Question 47

Many attribute the U.S. crisis of 2008-2009 to financial problems that happen in other countries.

Question 48

The future of the NYSE is uncertain due to their unwillingness to adapt to the increase in internationalization and electronic trading in the markets.
The NYSE is adapting to both aspects through acquisitions/mergers.

Question 49

The Sarbanes-Oxley Act of 2002 holds a firm's internal auditors legally accountable for the accuracy of their firm's financial statements.
Internal auditors have no such accountability (although, of course, they are held to professional standards of conduct). Within the firm, SOX legal accountability applies to the CEO and CFO.

Question 50

The weak form of the efficient market hypothesis states that an investor can profit by using past price data.
The weak form indicates that past pricing is unrelated to future pricing, and therefore has no predictive value.

Question 51

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

Question 52

In times of recession, a company's retained earnings may decline as a percent of internal funds.

Question 53

If a subscriber wants to buy a stock through an ECN with no sell order, the order will be executed and then matched after a sell order arrives.
Absent a sell order, the transaction cannot be executed. It can, however, wait for a matching sell order, or can sometimes be rerouted to another exchange.

Question 54

A key influence in recent years has been the growth in market value of futures exchanges.

Question 55

The largest net supplier of funds is the U.S. Treasury and other agencies of the government.

Question 56

Fannie Mae, Freddie Mac, and Sallie Mae are private stockholder-owned corporations whose stocks are traded on the NYSE.

Question 57

The "strong form" of the efficient market hypothesis states that prices reflect all public information only.
The strong form reflects PRIVATE as well as public information.

Question 58

The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their firm's financial statements.

Question 59

The purpose of Securities Act Amendments of 1975 is to protect the investors by forcing companies to reveal more relevant financial information.

Question 60

One of the advantages of the BATS exchange is that it simply matches orders in a very fast pace.

Question 61

Financial intermediaries serve which of the following purposes?

A) They allow for indirect investment in the capital markets by households.
B) They aid in the flow of funds through the economy.
C) They help provide allocation of funds to the best investments.
D) All of these options are correct

Question 62

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

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

Question 63

The formation of the European Monetary Union and its single currency Euro is expected to

A) eliminate foreign currency risk between its member countries.
B) create stock and bond prices denominated in euros.
C) have stock and bond indexes tracking a combined group of common stocks and bonds from the member countries.
D) all of these options are true.

Question 64

Federally sponsored credit agencies include all but which of the following?

A) Securities Investor Protection Corporation (SIPC)
B) Federal Home Loan Banks (FHLB)
C) Student Loan Marketing Association (Sallie Mae)
D) Federal National Mortgage Association (Fannie Mae

Question 65

With respect to the United States and its relationship with the rest of the world, it can be said that

A) the U.S. has invested more dollars in the rest of the world than foreign countries have invested in the U.S.
B) the U.S. has actively helped foreign countries finance their government deficits.
C) foreign investors hold large positions in U.S. government securities.
D) all of these options are true.

Question 66

Which of the following are benefits of financial intermediaries?

A) Increase market liquidity
B) Provide a direct market for investors
C) Act as agents of the government
D) Increase market liquidity and provide a direct market for investors

Question 67

Global capital markets are influenced by

A) interest rates.
B) investor confidence.
C) relative economic growth.
D) all of these options are true.

Question 68

Which of the following is not a money market instrument?

A) Treasury bills
B) Commercial paper
C) Negotiable certificates of deposit
D) Treasury bonds

Question 69

Which of the following was NOT a major supplier of funds to credit markets in 2008?

A) Households
B) Government sponsored agencies
C) Mutual funds and ETFs
D) All of the options were major suppliers of funds

Question 70

Foreign investors have preferred to invest in the United States EXCEPT for which of the following reasons?

A) Less stringent regulation of securities markets.
B) The political stability of the U.S. government.
C) The U.S. dollar is the world's international currency.
D) All of these options are reasons that foreign investors prefer to invest in the United States.

Question 71

When global capital markets collectively react to international events, like Russia's default on its sovereign debt, it is common to find

A) that there is no impact on the trade of foreign goods.
B) an impact on the ability to raise capital.
C) that Wall Street firms are so diversified that they are not affected by this event.
D) all of these options are true.

Question 72

The euro is

A) established in all of the European countries.
B) a common currency, but countries that use it are allowed to have their own monetary policy.
C) the most important international currency.
D) all of these options are true.

Question 73

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) A savings deposit in a commercial bank

Question 74

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

A) Short-term liabilities and equity
B) Long-term liabilities and equity
C) Near cash assets
D) Retained earnings

Question 75

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) None of these options are true.

Question 76

Companies list their stock around the globe to

A) capitalize on the inefficiency inherent in foreign markets.
B) decrease liquidity for their stockholders.
C) take advantage of currency differences.
D) increase liquidity for their stockholders and provide opportunities for the sale of new stock in foreign countries.

Question 77

The 1994 North American Free Trade Agreement was established between the U.S., Canada, and Mexico which helped

A) reduce trade barriers.
B) allow trade to happen between these countries.
C) lower the amount of illegal trading.
D) all of the answers are correct.

Question 78

During the next several years, the major threat to the dominance of the U.S. money and capital markets is expected to come from

A) Russia's difficulty in transforming its economy into a capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) the Eurozone countries comprising the European Monetary Union and a single currency.
D) the huge Chinese economy and its billion-plus people.

Question 79

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

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

Question 80

Which of the following is an internal source of funds?

A) Cash flow from depreciation (tax shield)
B) Net loss
C) Repurchase of debt securities
D) Bank loan