Deck 14: Capital Markets

Question 1

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.

Answer 1

C

Question 2

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.

Answer 2

C

Question 3

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.

Answer 3

A

Question 4

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 5

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 6

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 7

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 8

Which of the following is not a money market instrument?

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

Question 9

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 10

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 11

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

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

Question 12

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

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

Question 13

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 14

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 15

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

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

Question 16

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 17

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 18

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 19

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 20

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 21

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 22

"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 23

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 24

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 25

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 26

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 27

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 28

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 29

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 30

The accumulated debt of the federal government at its peak in 2014 was approximately:

A) $600 billion.
B) $200 billion.
C) $40 billion.
D) $30 billion.

Question 31

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 32

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 33

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 34

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 35

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 36

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

A) risen during times of high inflation.
B) risen between 2001 and 2013.
C) caused inflation to rise.
D) risen and fallen inversely to inflation rates.

Question 37

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 38

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 39

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 40

What caused the decrease in asset-backed securities issues between 2001 and 2014?

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

Question 41

The accumulated debt of the federal government and percentage of GDP this represented in 2014 was approximately:

A) $600 billion,32% of GDP.
B) $600 billion,70% of GDP.
C) $440 billion,68% of GDP.
D) $330 billion,36% of GDP.

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

Well functioning capital market include the following attributes except?

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

Question 49

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 50

The largest financial intermediary after banks is:

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

Question 51

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 52

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 53

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 54

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 55

Government auctions treasury bills:

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

Question 56

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 57

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 58

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 59

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 60

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 61

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 62

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

Question 63

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 64

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

Question 65

The headquarters for the OTC market is located in Montreal.

Question 66

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

Question 67

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

Question 68

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

Question 69

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 70

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

Question 71

The amount of Government of Canada bonds outstanding in foreign currencies during 2000 and 2013 respectively was approximately:

A) $50 and $30 billion.
B) $150 and $150 billion.
C) $180 and $425 billion.
D) $588 and $612 billion.

Question 72

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

Question 73

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 74

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

Question 75

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

A) that there is a positive impact on multinational companies' ability to raise capital.
B) an increase in capital available to companies with AAA grade credit ratings.
C) that multinational firms,though diversified,are not affected by this event.
D) a reduction in capital available to companies with investment grade credit ratings.

Question 76

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

Question 77

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 78

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

Question 79

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

Question 80

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