Deck 14: Capital Markets

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

In the last decade, the Chinese have invested in U.S. securities and real assets.

Question 11

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

Question 12

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

Question 13

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

Question 14

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.

Question 15

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

Question 16

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

Question 17

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

Question 18

The size of the common stock market is larger than the size of the corporate bond market.

Question 19

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

Question 20

Interest rates stayed relatively low during the 2012-2015 time frame, so more and more companies took on long-term debt rather than short-term debt.

Question 21

As interest rates begin to rise, this provides motivation for companies to issue long-term debt.

Question 22

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

Question 23

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 24

The NASDAQ market is the primary market for international securities.

Question 25

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

Question 26

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 27

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

Question 28

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

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

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

Question 31

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

Question 32

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

Question 33

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

Question 34

The market for common stocks dominates the corporate bond markets in size.

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

Many attribute the U.S. crisis of 2008-2009 to financial problems that happened in other countries.

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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 52

In times of recession, a company's retained earnings may decline as a percent of internal funds.

Question 53

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

Question 54

One of the advantages of the BATS exchange is that it simply matches orders in a very fast pace.

Question 55

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

Question 56

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 57

NASD regulates stockbrokers and brokerage firms.

Question 58

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

Question 59

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

Question 60

The purpose of the Securities Act of 1933 is to protect the investors by forcing companies to reveal more relevant financial information.

Question 61

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 62

Global capital markets are influenced by

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

Question 63

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 are true.

Question 64

A three-sector economy consists of business, government, and households, with the household sector being the major supplier of funds for investment.

Question 65

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 66

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

Question 67

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 are true.

Question 68

Companies list their stock around the globe to

A) capitalize on the inefficiency inherent in foreign markets.
B) decrease liquidity for their stockholders.
C) take advantage of currency differences.
D) increase liquidity for their stockholders and provide opportunities for the sale of new stock in foreign countries.

Question 69

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

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

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

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 72

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 73

All of these are recognized as 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 U.S. government promised to buy unlimited amounts of debt from FHLB.
D) Real estate prices collapsed.

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 are true.

Question 75

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 the trade of foreign goods.
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 76

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 77

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 78

The 1994 North American Free Trade Agreement was established between the U.S., Canada, and Mexico which helped

A) reduce trade barriers.
B) allow trade to happen between these countries.
C) lower the amount of illegal trading.
D) all of the answers are correct.

Question 79

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) Retained earnings

Question 80

The euro is

A) established in all of the European countries.
B) a common currency with monetary policy controlled by the European Central Bank.
C) the most important international currency.
D) all of these options are true.