Deck 14: Capital Markets

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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.

Answer 3

False

Question 4

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.

Question 5

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 6

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

Question 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

The European Union (EU) includes Britain, Germany, France, Italy, and seven other European countries.
As of 2013, the EU currently has 27 member nations.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

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

Question 21

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 22

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

Question 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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 30

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 31

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

Question 32

The NASDAQ market is the primary market for international securities.

Question 33

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 34

Without financial intermediaries, the cost of funds would be about the same as with financial intermediaries.
Intermediaries expedite the flow of funds efficiently, thereby reducing the cost of these funds.

Question 35

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 36

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

Question 37

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 38

NASD regulates stockbrokers and brokerage firms.

Question 39

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 40

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 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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 46

All of the following are recognized as important influences in the development of the banking crisis of 2008 and the resulting credit crisis EXCEPT for which one?

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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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 52

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 53

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 54

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

Question 55

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 56

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

Question 57

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

Question 58

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

Question 59

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.
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 60

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 61

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 62

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)the collapse of Asian currencies in Thailand, Indonesia, Malaysia, and Korea, and Russia's default on its sovereign debt.

Question 63

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

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

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

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 66

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)increase liquidity for their stockholders and provide opportunities for the sale of new stock in foreign countries.

Question 67

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 68

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 69

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)None of these options

Question 70

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 71

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

A)Britain, France, Germany, Spain, Italy, and six other European countries.
B)The establishment of a new European Central Bank to coordinate monetary policy for the Eurozone countries.
C)A new currency called the euro, which was put into circulation in all EMU countries.
D)All of these options.

Question 72

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

Question 73

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 options are true.

Question 74

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

Question 75

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 76

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 77

Global capital markets are influenced by

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

Question 78

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 79

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

Question 80

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