Deck 12: The Global Capital Market

Question 1

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

Answer 1

True
Explanation: The relatively low correlation between the movements of stock markets in different countries indicates that countries pursue different macroeconomic policies and face different economic conditions.

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

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

Answer 3

True
Explanation: Capital markets bring together those who want to invest money and those who want to borrow money.

Question 4

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 5

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

Question 6

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

Question 7

Eurocurrency can be created anywhere in the world.

Question 8

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

Question 9

Economist Martin Feldstein has coined the term "hot money" to pertain to long-term capital flows.

Question 10

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

Question 11

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

Question 12

Financial services is an information-intensive industry.

Question 13

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

Question 14

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

Question 15

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

Question 16

Eurobonds fall within the regulatory domain of European Economic Community.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

An integrated international capital market is _____ compared to a nonintegrated market.

A) highly volatile
B) more shock-proof
C) less volatile
D) less resistant to change

Question 22

The cost of capital is:

A) higher in a purely domestic capital market than in a global market.
B) lower in a domestic capital market than in an international market.
C) higher in a global market than in a purely domestic capital market.
D) the same in either a global market or a purely domestic capital market.

Question 23

_____ is characterized by lack of government regulation.

A) The Eurocurrency market
B) A money market fund
C) The New Your Stock Exchange
D) A hedge fund

Question 24

A factor that makes the Eurocurrency market attractive to both depositors and borrowers is:

A) it allows fair trade within the European Union.
B) its strong government regulations and safeguards.
C) its commitment to economic growth in underdeveloped nations.
D) its lack of government regulation.

Question 25

Companies receive a _____ when using the Eurocurrency market.

A) lower interest rate on deposits and pay more for loans
B) tax incentives
C) higher interest rate on deposits and pay less for loans
D) liquid asset reserve waiver

Question 26

The risk associated with a portfolio:

A) declines exponentially as the number of stocks purchased increases and continues to decline until a point of zero risk is reached.
B) decreases as the investor increases the number of stocks in her portfolio.
C) grows exponentially with the number of stocks purchased.
D) increases as the investor increases the number of stocks in her portfolio.

Question 27

Foreign bonds sold in the United States are called _____.

A) Yankee bonds
B) Uncle Sam's bonds
C) Bulldogs
D) Eagles

Question 28

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

Question 29

_____ perform a direct connection function in capital markets.

A) Insurance brokers
B) Investment banks
C) Pension fund managers
D) Commercial banks

Question 30

Investors who purchase a fixed-rate bond receive:

A) incremental payouts until the bonded money runs out.
B) cash payoffs only at maturity.
C) a full cash payoff on demand.
D) a fixed set of cash payoffs.

Question 31

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

A) Diversification
B) Capital flow
C) Systematic risk
D) Correlation movement

Question 32

The systematic risk is the:

A) movement in a stock portfolio's value that is attributable to the individual selections made for that portfolio.
B) level of diversifiable risk in an economy.
C) movement of the economy of a country.
D) level of non-diversifiable risk in an economy.

Question 33

Hedge funds position themselves to make:

A) "long bets" on assets that they think will weather a volatile market.
B) "long bets" on assets that they think will increase in value.
C) "short bets" on assets that they think will weather a volatile market.
D) "short bets" on assets that they think will increase in value.

Question 34

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

A) held in reserves
B) unlimited
C) based upon the stock market
D) limited

Question 35

Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include:

A) governments
B) corporations with surplus cash
C) pension funds
D) insurance companies

Question 36

_____ deposits are regulated in most industrialized countries.

A) U.S. currency
B) Domestic currency
C) Foreign currency
D) Eurocurrency

Question 37

A Eurocurrency is:

A) the currency used by the countries of the European Union.
B) the currency formerly used in many European countries before the formation of the European Union and the institution of the euro.
C) any currency banked outside of its country of origin.
D) any currency banked within a European country.

Question 38

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

A) equity loan
B) stock loan
C) debt loan
D) bonded loan

Question 39

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 40

The forward exchange market does not provide adequate coverage for long-term borrowings.

Question 41

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 42

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 43

Entering into a forward contract will:

A) increase the risk involved in a transaction.
B) lower the borrower's cost of capital.
C) benefit the borrower because their interest rate will be lower.
D) raise the borrower's cost of capital.

Question 44

Which of the following statements is true of market makers?

A) Commercial banks are not allowed to 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 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

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 47

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 48

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 49

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

A) investment 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 50

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 are 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 51

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 52

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.
D) declines rapidly in the beginning.

Question 53

_____ are normally underwritten by an international syndicate of banks.

A) Samurai bonds
B) Eurobonds
C) Yankee bonds
D) Foreign bonds

Question 54

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 55

A purely domestic capital market faces the problem of _____.

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

Question 56

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 57

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 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

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 60

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

A) hedge fund insurance
B) prevailing exchange rate
C) forward
D) global capital market

Question 61

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 62

_____ 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

Question 63

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 64

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 65

_____ 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 66

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 67

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 68

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 69

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 70

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 71

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 72

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 73

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) sold outside the borrower's county with reference to the originating currency.

Question 74

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 75

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 76

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 77

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 78

_____ 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 79

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 80

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

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