Deck 12: The Global Capital Market

Question 1

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

Answer 1

False

Question 2

The Eurocurrency market has been one cause of a decrease in global financial regulations.

Answer 2

True

Question 3

Eurocurrency can be created anywhere in the world.

Answer 3

True

Question 4

If the international capital market continues to grow, financial intermediaries likely will provide less quality information about foreign investment opportunities.

Question 5

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

Question 6

The global capital market often lacks information about the fundamental quality of foreign investments.

Question 7

Financial services has historically been the most tightly regulated of all industries.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

The globalization of capital has been universally seen as a positive development.

Question 16

The cost of recording, transmitting, and processing information has doubled with advancements in technology since 1964.

Question 17

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

Question 18

Financial services is an information-intensive industry.

Question 19

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

Question 20

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 21

A Chinese firm borrows 1 million U.S. dollars from an American bank. The cost of this loan will be less if the U.S. dollar appreciates against the Chinese currency.

Question 22

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 23

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 24

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

Question 25

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 26

The systematic risk of the stock market 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 nondiversifiable risk in an economy.

Question 27

________ requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

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

Question 28

________ perform a direct connection function in capital markets.

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

Question 29

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

Question 30

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 31

Eurobonds fall within the regulatory domain of the European Economic Community.

Question 32

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 33

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 34

Historically, regulatory barriers have made national equity markets work together.

Question 35

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 36

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

Question 37

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 38

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

Question 39

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 40

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 41

In ________, the limited pool of investors implies that borrowers must pay more to persuade investors to lend them their money.

A) a purely domestic market
B) a mixed market
C) an international market
D) a purely Euro market

Question 42

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 43

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 44

________ is made when a corporation sells stock to investors.

A) A corporate bond sale
B) A debt loan
C) A Eurobond investment
D) An equity loan

Question 45

Hedge funds position themselves to make ________ bets on assets that they think will ________.

A) long; weather a volatile market
B) long; increase in value
C) short; weather a volatile market
D) short; increase in value

Question 46

The element of risk into investing in foreign assets is greater with ________ exchange rates.

A) floating
B) pegged
C) fixed
D) managed

Question 47

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 48

Which of the following statements is true of the deregulation of the 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 49

Harvard economist Martin Feldstein argues that the lack of patient money is due to

A) the flood of information, due to the Internet, that investors receive about current events in other countries.
B) money owners and managers preferring to keep their money "home."
C) the relative scarcity of information that investors have about foreign investments.
D) money owners and managers preferring to place their money in foreign investments.

Question 50

A purely domestic capital market faces the problem of

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

Question 51

What is a disadvantage of the 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 52

A ________ market benefits investors by providing a wider range of investment opportunities, thereby allowing them to build portfolios of international investments that diversify their risks.

A) foreign exchange
B) global capital
C) domestic exchange
D) domestic capital

Question 53

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 flows.
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 54

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 decision-making systems.
D) It does not require the processing of large volumes of information.

Question 55

According to some analysts, deregulation and reduced controls on cross-border capital flows are

A) having a stabilizing effect on national economies.
B) making individual nations more vulnerable to speculative capital flows.
C) making investors nervous and causing them to pull their money out of foreign nations.
D) allowing undeveloped nations to enter the global market.

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

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) most stock markets are highly segmented from each other.

Question 58

Investors are able to reduce risks by diversifying an investment portfolio internationally, and the risk reduction effects would be greater if not for

A) volatile exchange rates associated with the current floating exchange risk regime.
B) the different kinds of tax regimes in different countries.
C) the inaccessibility of foreign stock exchanges to most investors.
D) the poor quality of many stocks in international start-up firms.

Question 59

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 60

What is a disadvantage of the integration of the international capital market 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 61

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 62

Companies receive ________ when using the Eurocurrency market.

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

Question 63

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 64

________ deposits are regulated in all industrialized countries.

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

Question 65

The United States sells bonds that are denominated in dollars in Europe. This is an example of a 

A) foreign bond.
B) Eurobond.
C) micro bond.
D) regulatory bond.

Question 66

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 67

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 68

The Eurocurrency market is attractive to both depositors and borrowers because

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

Question 69

What 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 70

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 71

________ 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 72

Which of the following statements is true of Eurocurrency?

A) The 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 73

________ 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 74

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 75

________ are normally underwritten by an international syndicate of banks.

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

Question 76

Foreign bonds sold in the United States are

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

Question 77

One drawback of the Eurocurrency market is

A) increased governmental controls.
B) high reserve ratio requirements.
C) low interest rates on deposits.
D) exposure to foreign exchange risk.

Question 78

________ is characterized by a lack of government regulation.

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

Question 79

When using the Euromarkets, companies

A) have funds that lack liquidity.
B) pay less for loans.
C) attract low interest rates.
D) are secured from foreign exchange risks.

Question 80

Eurodollars are

A) the exchange value of the dollar with the euro.
B) used to pay for imports from Europe.
C) dollars banked outside of the United States.
D) the exchange buffer that the euro has against dollar.