Deck 14: Capital Markets

Question 1

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 eleven countries.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

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

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

Question 7

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

Question 8

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

Question 9

Short-term markets that are composed of securities with maturities of less than one month are referred to as money markets.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Money markets are the simplest form of capital markets because they involve trading in U.S. dollars.

Question 17

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

Question 18

In the last decade, the US has invested substantially more in foreign countries than foreign countries have invested back in the US.

Question 19

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

Question 20

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

Question 21

The highest supplier of funds to the U.S. credit markets were foreign investors.

Question 22

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

Question 23

The NYSE purchased Archipelago (an ECN) in 2005 in order to expand its floor-trading capabilities.

Question 24

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

Question 25

The major suppliers of funds to the U.S. credit markets were foreign suppliers, mutual funds, and federal, state and local governments.

Question 26

Financial intermediaries help eliminate inefficiencies such as indirect investment by households.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

Securities issued by states and municipalities are referred to as statutory bonds and municipal bonds, respectively.

Question 32

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

Question 33

NASD regulates stock brokers and brokerage firms.

Question 34

NASDAQ market is the primary market for international securities.

Question 35

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

Question 36

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

Question 37

A key variable of market efficiency is the certainty of the income stream. The most efficient market is for corporate securities.

Question 38

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

Question 39

Retained earnings account for the majority of internally generated corporate funds.

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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 47

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

Question 48

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

Question 49

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

Question 50

The future of the NYSE is uncertain due to their unwillingness to adapt to the increase in internationalization and electronic trading in the markets.

Question 51

If a subscriber wants to buy a stock through an ECN, if there are no sell orders, the order will be executed and then matched after a sell order arrives.

Question 52

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

Question 53

The Sarbanes-Oxley Act of 2002 holds a firm's internal auditors legally accountable for the accuracy of their firm's financial statements.

Question 54

The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from fraudulent activities.

Question 55

Commission rates for stock transactions are fixed as a result of the Securities Act Amendments of 1975.

Question 56

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

Question 57

2008 was a unique year in the credit markets because the leader, in traditional times, provided no net new funds to credit markets.

Question 58

One of the advantages of the BATS exchange stems from its home in Kansas.

Question 59

Many attribute the banking crisis of 2008-2009 with problems in the futures markets.

Question 60

In times of recession, retain earnings decline as a percent of internal funds.

Question 61

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 62

The majority of total dollar trading volume in 2008 took place in U.S. financial markets.

Question 63

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 64

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.

Question 65

Financial instruments in the capital markets generally fall under what category in the Balance Sheet?

A) Short-term liabilities and equities.
B) Long-term liabilities and equities.
C) Near cash assets.
D) None of these.

Question 66

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.

Question 67

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

Question 68

Global capital markets are influenced by

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

Question 69

During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from

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

Question 70

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

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

Question 71

Companies list their stock around the globe to

A) capitalize on the inefficiency inherent in foreign markets.
B) increase liquidity for their stockholders.
C) provide opportunities for the sale of new stock in foreign countries.
D) b and c are correct.

Question 72

Evidence of how global markets are linked was provided in 1997 and 1998 when international markets reacted to

A) the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Korea.
B) Russia's default on its sovereign debt.
C) Japan's seven years of economic stagnation.
D) a and b are true.

Question 73

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

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

Question 74

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 above were major suppliers of funds.

Question 75

Which of the following statements concerning futures markets is false?

A) Futures markets allow investors to manage risk.
B) Futures markets can be used to hedge against changing commodity prices.
C) Interest rate futures can be used to hedge against the risk of rising interest rates.
D) All of the statements above are true.

Question 76

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 multinational companies' ability to raise capital.
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 are true.

Question 77

All of the following are recognized as an 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 IMF bailed out Freddie Mac and Fannie Mae.
D) Real estate prices collapsed.

Question 78

The European Monetary Union (EMU) which came into effect in January of 1999 includes

A) Britain, France, Germany, Spain, Italy and 6 other European countries.
B) The establishment of a new European Central Bank to coordinate monetary policy for the Euro-zone countries.
C) A new currency called the Euro, which will be put into circulation in all EMU countries no later than 2009.
D) All of these.

Question 79

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.

Question 80

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.