Deck 11: The Global Capital Market

Question 1

Commercial banks take cash deposits from corporations and individuals and pay them a rate of interest in return.

Answer 1

True

Question 2

One of the most important drawbacks of the limited liquidity of an international capital market is that the cost of capital tends to be higher than it is in a purely domestic market.

Answer 2

False

Question 3

Commercial banks perform a direct connection function between investors and borrowers.

Answer 3

False

Question 4

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

Question 5

Systematic risk refers to movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy,rather than factors specific to an individual firm.

Question 6

By diversifying a portfolio internationally,an investor's level of risk is increased even further because the movements of stock market prices across countries are not perfectly correlated.

Question 7

Market makers are the financial service companies that connect investors and borrowers,either directly or indirectly.

Question 8

The larger pool of investors in an international market implies that borrowers will be able to pay more.

Question 9

Commercial banks bring investors and borrowers together but do not charge any commissions for doing so.

Question 10

In a purely domestic capital market,the liquidity of the market is limited.

Question 11

By holding a variety of stocks in a diversified portfolio,the losses incurred when some stocks fail to live up to their promises are offset by the gains enjoyed when other stocks exceed their promise.

Question 12

The cost of capital is the rate of return that borrowers must pay investors.

Question 13

When an investor purchases a corporate stock,he purchases the right to receive a specified fixed stream of income from the corporation for a specified number of years.

Question 14

The systematic risk is the level of diversifiable risk in an economy.

Question 15

Problems of limited liquidity are strictly restricted to less developed nations,which tend to have smaller domestic capital markets.

Question 16

As an investor increases the number of stocks in her portfolio,the portfolio's risk increases.

Question 17

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

Question 18

By using the global capital market,investors can diversify their portfolios internationally,thereby reducing their risk to below what could be achieved in a purely domestic capital market.

Question 19

According to recent studies,different national stock markets appear to be only moderately correlated.

Question 20

A share of stock gives its holder a claim to a firm's profit stream and the corporation honors this claim by paying interest to the stockholders.

Question 21

The risk-reducing effects of international portfolio diversification would be lesser were it not for the current floating exchange rate regime.

Question 22

Deregulation in a number of key countries has facilitated the growth of the international capital market.

Question 23

The main factor that makes the eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.

Question 24

A lack of information about the fundamental quality of foreign investments may encourage speculative flows in the global capital market.

Question 25

By using the global capital market,firms can often borrow funds at a lower cost than is possible in a purely domestic capital market.

Question 26

According to some analysts,deregulation and reduced controls on cross-border capital flows are making individual nations more vulnerable to speculative capital flows.

Question 27

Harvard economist Martin Feldstein argues that short-term capital is still relatively rare,primarily because although capital is free to move internationally,its owners and managers still prefer to keep most of it at home.

Question 28

The global financial crisis of 2008 and 2009 focused attention on the need for new regulations to govern certain sectors of the financial services industry.

Question 29

The relatively low correlation between the movements of stock markets in different countries reflects that different stock markets are still somewhat segmented from each other by capital controls.

Question 30

Floating exchange rates reduce the element of risk involved in investing in foreign assets.

Question 31

Domestic currency deposits are regulated in all industrialized countries.

Question 32

Regulated domestic currency deposits ensure that banks have enough liquid funds to satisfy demand if large numbers of domestic depositors should suddenly decide to withdraw their money.

Question 33

Barriers to cross-border capital flows limit the ability of capital to roam the world freely in search of the highest risk-adjusted return; consequently,at any one time,there may be too much capital invested in some markets and too little in others.

Question 34

A eurocurrency is the currency used by the countries of the European Union.

Question 35

The financial crisis that started in the United States and swept around the world in 2008 and 2009 could be attributed to the increasing correlation between different stock markets across the world.

Question 36

There is a perception that in the last 10 years the growing integration of the global economy and the emergence of the global capital market have increased the correlation between different stock markets,increasing the benefits of international diversification.

Question 37

The spread between the eurocurrency deposit rate and the eurocurrency lending rate is higher than the spread between the domestic deposit and lending rates.

Question 38

Barriers to cross-border capital flows could ultimately tend to produce differences in rates of return across stock markets.

Question 39

Adverse exchange rate movements can transform otherwise profitable investments into unprofitable investments.

Question 40

Eurobonds are usually offered simultaneously in several national capital markets,but neither in the capital market of the country,nor to residents of the country,in whose currency they are denominated.

Question 41

In 1997,the stock markets of several Asian countries,including South Korea,Malaysia,Indonesia,and Thailand,lost over 50 percent of their value in response to the Asian financial crisis,while at the same time the S&P 500 increased in value by over 20 percent.This indicates that:

A)relatively low correlation exists between the movement of stock markets in different countries.
B)international diversification has failed in reducing the risks of global capital movement.
C)capital controls result in segmentation of different stock markets.
D)the integration of global capital disproportionately favors developed countries in Europe and America.

Question 42

According to data from the Bank for International Settlements,

A)by late 2008,the stocks of cross-border bank loans were significantly less as compared to those in 1990.
B)international equity issues were actually higher in 2007.
C)outstanding international bonds in late 2008 were down from those in 1997.
D)the international capital market was in recession from the 1980s to the early 2000s.

Question 43

Identify the incorrect statement pertaining to commercial banks.

A)They perform an indirect connection function.
B)They lend investors money to borrowers at a higher rate of interest,making a profit from the difference in interest rates.
C)They bring investors and borrowers together and charge commissions for it.
D)They take cash deposits from corporations and individuals and pay them a rate of interest in return.

Question 44

When an investor purchases _____,he purchases the right to receive a specified fixed stream of income from the corporation for a specified number of years.

A)a corporate bond
B)a company share
C)eurocurrency bonds
D)equity holdings

Question 45

The cost of capital:

A)is the price of borrowing money,which is the rate of return that borrowers must pay investors.
B)tends to be higher in an international capital market than it is in a purely domestic market.
C)in a purely domestic market implies that borrowers must pay less to persuade investors to lend them their money.
D)in an international market implies that borrowers will be able to pay more to persuade investors to lend them their money.

Question 46

According to a study by Bruno Solnik:

A)a fully diversified portfolio of international stocks is only about 75 percent as risky as a typical individual stock.
B)a fully diversified portfolio of U.S.stocks is about 2 percent as risky as a typical individual stock.
C)a fully diversified portfolio that contains stocks from many countries is less than half as risky as a fully diversified portfolio that contains only U.S.stocks.
D)there is no relationship between international diversification and risk.

Question 47

A(n)_____ brings together those who want to invest money and those who want to borrow money.

A)capital market
B)high net worth investor
C)consumer market
D)retailer

Question 48

Which of the following statements regarding barriers to cross-border capital flows is not true?

A)They limit the ability of capital to roam the world freely in search of the highest risk-adjusted return.
B)They can lead to too much capital being invested in some markets and too little in others,at any one time.
C)They are no longer responsible for the relatively low correlation between the movements of stock markets in different countries.
D)They include limits on the amount of a firm's stock that a foreigner can own and limits on the ability of a country's citizens to invest their money outside that country.

Question 49

All of the following statements regarding the effects of exchange rates on international portfolio diversification are true,except:

A)the volatile exchange rates associated with the current floating exchange rate regime increase the risk-reducing effects of international portfolio diversification.
B)floating exchange rates introduce an additional element of risk into investing in foreign assets.
C)adverse exchange rate movements can transform otherwise profitable investments into unprofitable investments.
D)uncertainty engendered by volatile exchange rates may act as a brake on the otherwise rapid growth of the international capital market.

Question 50

As an investor increases the number of stocks in her portfolio,the portfolio's risk:

A)increases initially.
B)does not change.
C)declines rapidly in the beginning.
D)increases exponentially beyond a point.

Question 51

Market makers are:

A)financial service companies that connect investors and borrowers.
B)those who want to borrow money including individuals,companies,and governments.
C)nonbank financial institutions who want to invest money.
D)high net worth individuals with surplus cash to reinvest.

Question 52

_____ refers to movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy,rather than factors specific to an individual firm.

A)Financial risk
B)Portfolio risk
C)Systematic risk
D)Unplanned risk

Question 53

The relatively low correlation between the movements of stock markets in different countries reflects all of the following basic factors except:

A)countries pursue different macroeconomic policies and face different economic conditions,so their stock markets respond to different forces and can move in different ways.
B)different stock markets are still somewhat segmented from each other by capital controls.
C)restrictions on cross-border capital flows still separate different stock markets.
D)barriers to cross-border capital flows drastically increase the ability of capital to roam the world freely in search of the highest risk-adjusted return.

Question 54

Which of the following are among the best examples of market makers?

A)Individuals
B)Regulatory agencies
C)Governments
D)Commercial banks

Question 55

Which of the following statements about the financial services industry is not true?

A)It is an information-intensive industry.
B)It has been revolutionized more than any other industry by advances in information technology since the 1970s.
C)It is now technologically possible for financial services companies to engage in 24-hour-a-day trading.
D)It saw the real cost of recording,transmitting,and processing information increase by 25 percent between 1964 and 1990.

Question 56

An equity loan:

A)does not give its holder a claim to a firm's profit stream.
B)is made when a corporation sells stock to investors.
C)includes cash loans from banks and funds raised from the sale of corporate bonds to investors.
D)requires the corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

Question 57

Which of the following is not likely to be a reason for investors to use the global capital market?

A)They have a higher cost of capital as compared to purely domestic capital markets.
B)They have a much wider range of investment opportunities than in a purely domestic capital market.
C)They can diversify their portfolios internationally.
D)They can reduce their risk through portfolio diversification to below what could be achieved in a purely domestic capital market.

Question 58

According to the text,various studies have confirmed that despite casual observations different national stock markets appear to be:

A)positively correlated.
B)negatively correlated.
C)strongly correlated.
D)only moderately correlated.

Question 59

All of the following are benefits of global capital markets,except:

A)they increase the supply of funds available to borrowers.
B)that the risk to the investment portfolio is reduced to below what could be achieved in a purely domestic capital market.
C)they provide a wider range of investment opportunities to investors.
D)they have higher cost of capital as compared to purely domestic capital markets.

Question 60

Identify the incorrect statement regarding debt loans.

A)They are made when a corporation sells stock to investors and gives its holders a claim to the firm's profit stream.
B)Management has no discretion as to the amount it will pay investors.
C)They include cash loans from banks and funds raised from the sale of corporate bonds to investors.
D)They require the corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

Question 61

These 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)Eurobonds
B)Convertible bonds
C)Foreign bonds
D)Regulatory bonds

Question 62

Which of the following is not a feature of the eurobond market that makes it an appealing alternative to most major domestic bond markets?

A)An absence of regulatory interference.
B)Ability to offer the bonds to residents of the country in whose currency they are denominated.
C)Less stringent disclosure requirements than in most domestic bond markets.
D)A favorable tax status.

Question 63

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

A)relative paucity of information that investors have about foreign investments.
B)relative abundance of hot money.
C)restrictions on international capital movements.
D)increasing trend of excessive intra-day volatility in global capital markets.

Question 64

_____ are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued.

A)Eurobonds
B)Convertible bonds
C)Foreign bonds
D)Regulatory bonds

Question 65

In late 1997,a deal brokered by the _____ removed many of the restrictions on cross-border trade in financial services and facilitated further growth in the size of the global capital market.

A)European Union
B)World Trade Organization
C)International Monetary Fund
D)World Bank

Question 66

Which of the following is an impact of the growth of international communication technology,on the financial industry?

A)The emergence of a segregated international capital market.
B)Complexity of the data volume restricts trading to "acceptable hours."
C)Shocks that occur in one financial center now spread around the globe very quickly.
D)Lack of systems integration hinders real-time data transfer across different countries.

Question 67

A(n)_____ is any currency banked outside of its country of origin.

A)dollar amount
B)global currency
C)international currency
D)eurocurrency

Question 68

The main factor that makes the eurocurrency market attractive to both depositors and borrowers is that:

A)it allows banks to offer lower interest rates to cash depositor on home currency deposits than on deposits made in eurocurrency.
B)it lacks government regulation and banks are given much more freedom in their dealings in foreign currencies.
C)it allows banks to charge borrowers a lower interest rate for borrowings in the home currency than for borrowings in eurocurrency.
D)the spread between the eurocurrency deposit rate and lending rate is more than the spread between the domestic deposit and lending rates.

Question 69

According to Harvard economist Martin Feldstein _____ supports long-term cross-border capital flows.

A)hot money
B)patient money
C)short-term capital
D)investment capital

Question 70

Why do many companies borrow funds in their domestic currency even though the eurocurrency markets may offer more attractive interest rates?

A)To reduce operational expenses
B)To avoid systemic risk
C)To avoid reinvestment risk
D)To avoid foreign exchange risk

Question 71

Which event was initially responsible for London becoming the leading center of eurocurrency trading?

A)Regulations that discouraged British banks from trading in the eurocurrency market.
B)Strengthening of the British pound against major European currencies in the 1960s.
C)Collapse of the Bretton Woods system.
D)Prohibition of British banks from lending British pounds to finance non-British trade.

Question 72

Which of the following is not a trend toward deregulation that facilitated the growth of the international capital market?

A)The U.S.,in 1970s and early 80s,allowing foreign banks to enter the U.S.capital market and domestic banks to expand their operations overseas.
B)Great Britain's removal of barriers,in October 1986,that had existed between banks and stockbrokers and allowed foreign financial service companies to enter the British stock market.
C)Restrictions on the entry of foreign securities houses in Japan,and Japanese banks not being allowed to open international banking facilities.
D)In Germany,foreign banks being allowed to lend and manage foreign euro issues,subject to reciprocity agreements.

Question 73

The international capital market boom in the 1980s,1990s,and 2000s can be attributed to the

A)advances in information technology.
B)increased regulations by governments.
C)increase in real cost of recording,transmitting,and processing information.
D)decreased acceptance of the free market ideology.

Question 74

_____ position themselves to make "long bets" on assets that they think will increase in value,and "short bets" on assets that they think will decline in value.

A)Growth funds
B)Arbitrageurs
C)Hedge funds
D)Debt funds

Question 75

Analysts who believe that the globalization of capital has serious inherent risks argue that:

A)due to deregulation and reduced controls on cross-border capital flows,individual nations are becoming more vulnerable to speculative capital.
B)most of the capital that moves internationally is pursuing long term gains,and it does not shift in and out of countries as quickly as conditions change.
C)"hot money" is still relatively rare,primarily because although capital is free to move internationally,its owners and managers still prefer to keep most of it at home.
D)the lack of short-term capital is due to the relative paucity of information that investors have about foreign investments.

Question 76

Which of the following is a drawback of the eurocurrency market?

A)High reserve ratio requirements
B)Higher cost of transaction
C)Lower interest rates on deposits
D)Exposure to foreign exchange risk

Question 77

The global trend toward the deregulation of financial markets has been facilitated by all of the following developments,except:

A)the development of the eurocurrency market.
B)pressure from financial services companies wanting to operate in a less regulated environment.
C)increasing rejection of the free market ideology associated with an individualistic political philosophy.
D)changes in the U.S.that allowed foreign banks to enter the U.S.capital market and domestic banks to expand their operations overseas.

Question 78

According to Harvard economist Martin Feldstein,"patient money"

A)is relatively abundant.
B)implies short-term capital.
C)is another term for "hot money."
D)is still relatively rare.

Question 79

Companies with historic roots in one nation are broadening their stock ownership by listing their stock in the equity markets of other nations because of all of the following reasons,except:

A)listing stock on a foreign market is often a prelude to issuing stock in that market to raise capital.
B)they can tap into the liquidity of foreign markets,thereby increasing the funds available for investment and lowering the firm's cost of capital.
C)it facilitates future acquisitions of foreign companies.
D)it helps in decreasing the company's visibility with local employees,customers,suppliers,and bankers.

Question 80

A eurocurrency

A)can be created anywhere in the world.
B)should be created and banked in Europe.
C)can be created only in its country of origin.
D)refers to any former national currency of EU members.