A capital market brings together those who want to invest money and those who want to borrow money.
TRUE
Capital markets bring together those who want to invest money and those who want to borrow money.
Market makers are companies that make large investments in governmental bonds.
FALSE
Market makers are the financial service companies that connect investors and borrowers. Those who want to invest money include corporations with surplus cash, individuals, and non-bank financial institutions. Those who want to borrow money include individuals, companies, and governments.
Commercial banks perform a direct connection function in capital markets.
Market makers are the financial service companies that connect investors and borrowers. They include commercial banks and investment banks. Commercial banks perform an indirect connection function.
An investor purchases the right to receive a specified fixed stream of income from the corporation when he purchases a share of stock.
An equity loan is made when a corporation sells stock to investors. The money the corporation receives in return for its stock can be used to purchase plants and equipment, fund R&D projects, pay wages, and so on. A share of stock gives its holder a claim to a firm's profit stream.
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.
A debt loan requires the corporation to repay a predetermined portion of the loan amount (the sum of the principal plus the specified interest) at regular intervals regardless of how much profit it is making.
Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors.
A debt loan requires the corporation to repay a predetermined portion of the loan amount (the sum of the principal plus the specified interest) at regular intervals regardless of how much profit it is making. Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors.
The liquidity of the market is limited in a purely domestic capital market.
In a purely domestic capital market, the pool of investors is limited to residents of the country. This places an upper limit on the supply of funds available to borrowers. In other words, the liquidity of the market is limited.
The cost of capital is the difference between cost of inputs and outputs.
The cost of capital is the price of borrowing money, which is the rate of return that borrowers must pay investors. This is the interest rate on debt loans and the dividend yield and expected capital gains on equity loans.
The cost of capital is higher in a global market than in a purely domestic capital market.
One of the drawbacks of the limited liquidity of a purely domestic capital market is that the cost of capital tends to be higher than it is in a global market.
By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market.
The risk associated with a portfolio increases as the investor increases the number of stocks in her portfolio.
As an investor increases the number of stocks in her portfolio, the portfolio's risk declines. At first this decline is rapid. Soon, however, the rate of decline falls off and asymptotically approaches the systematic risk of the market.
12. Investors can reduce the level of risk by diversifying a portfolio internationally.
A portfolio's risk declines as the investor increases the number of stocks in the portfolio. By diversifying a portfolio internationally, an investor can reduce the level of risk even further because the movements of stock market prices across countries are not perfectly correlated.
Systematic risk refers to the movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy.
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.
The systematic risk is the level of diversifiable risk in an economy.
Systematic risk refers to movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy. The systematic risk is the level of non-diversifiable risk in an economy.
The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions.
The relatively low correlation between the movements of stock markets in different countries indicates that countries pursue different macroeconomic policies and face different economic conditions.
Using floating exchange rates will help countries reduce the risk of investing in foreign assets.
The risk-reducing effects of international portfolio diversification would be greater were it not for the volatile exchange rates associated with the current floating exchange rate regime. Floating exchange rates introduce an additional element of risk into investing in foreign assets.
Financial services is an information-intensive industry.
Financial services is an information-intensive industry. It draws on large volumes of information about markets, risks, exchange rates, interest rates, creditworthiness, and so on.
An integrated international capital market is less volatile compared to a nonintegrated market.
The integration facilitated in the global capital markets cause shocks that occur in one financial center now spread around the globe very quickly. This makes the global markets highly volatile.
Hedge funds position themselves to make "long bets" on assets that they think will increase in value.
Hedge funds are private investment funds that 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.
Global capital market often lack information about the fundamental quality of foreign investments.
A lack of information about the fundamental quality of foreign investments may encourage speculative flows in the global capital market. Faced with a lack of quality information, investors may react to dramatic news events in foreign nations and pull their money out too quickly.
A Eurocurrency is the currency used by the countries of the European Union.
A Eurocurrency is any currency banked outside of its country of origin. The Eurocurrency market has been an important and relatively low-cost source of funds for international businesses.
Eurocurrency can be created anywhere in the world.
Eurocurrency can be created anywhere in the world. The persistent Euro- prefix reflects the European origin of the market.
A factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.
The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.
Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency.
The Eurocurrency market lacks government regulation. The lack of regulation allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency.
The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates.
Banks offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency. The lack of regulation also allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency. This makes the spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is less than the spread between the domestic deposit and lending rates.
Eurocurrency market is characterized by lack of government regulation.
Domestic currency deposits are regulated in most industrialized countries.
Domestic currency deposits are regulated in all industrialized countries. Such regulations ensure that banks have enough liquid funds to satisfy demand if large numbers of domestic depositors should suddenly decide to withdraw their money.
Governments give banks less freedom when they deal in foreign currencies.
Banks are given much more freedom in their dealings in foreign currencies.
Companies receive a higher interest rate on deposits and pay less for loans when using the Eurocurrency market.
There are strong financial motivations for companies to use the Eurocurrency market. By doing so, they receive a higher interest rate on deposits and pay less for loans.
Depositors are not protected against bank failures in the Eurocurrency market.
When depositors use a regulated banking system, the probability of a bank failure that would cause them to lose their deposits is very low. In an unregulated system such as the Eurocurrency market, the probability of a bank failure that would cause depositors to lose their money is greater.
Investors who purchase a fixed-rate bond receive cash payoffs only at maturity.
The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs. Each year until the bond matures, the investor gets an interest payment and then at maturity he gets back the face value of the bond.
Foreign bonds are sold within the borrower's country and are denominated in the currency of the country in which they are issued.
Foreign bonds are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued.
Foreign bonds sold in the United States are called bulldogs.
Many foreign bonds have nicknames; foreign bonds sold in the United States are called Yankee Bonds and foreign bonds sold in Great Britain are called bulldogs.
Eurobonds are usually offered to residents of the country in whose currency they are denominated.
Eurobonds are usually offered simultaneously in several national capital markets, but not in the capital market of the country, nor to residents of the country, in whose currency they are denominated.
Eurobonds are normally underwritten by an international syndicate of banks.
Eurobonds are normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated.
Government limitations are more severe for securities denominated in foreign currencies than for domestic securities.
Government limitations are generally less stringent for securities denominated in foreign currencies and sold to holders of those foreign currencies.
Eurobonds fall within the regulatory domain of European Economic Community.
Eurobonds fall outside of the regulatory domain of any single nation. As such, they can often be issued at a lower cost to the issuer.
Historically substantial regulatory barriers separated national equity markets from each other.
A Chinese firm borrows 1 million U.S. dollars from an American bank. The cost of this loan will be less if U.S. dollar appreciates against the Chinese currency.
Movements in foreign exchange rates can substantially increase the cost of foreign currency loans. In this case, the value of the loan increases as U.S. dollar appreciates.
Borrowers can hedge against foreign exchange risks by entering into a forward contract.
Borrowers can hedge against foreign exchange risks by entering into a forward contract to purchase the required amount of the currency being borrowed at a predetermined exchange rate when the loan comes due.
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
D
Capital markets bring together those who want to invest money and those who want to borrow money. Those who want to invest money include corporations with surplus cash, individuals, and nonbank financial institutions. Those who want to borrow money include individuals, companies, and governments.
Market makers are _____.
financial service companies that connect investors and borrowers
nonbank financial institutions who want to invest money
high net worth individuals with surplus cash to reinvest
those who want to borrow money including individuals, companies, and governments
1
Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. Market makers act between investors and borrowers.
Which of the following statements is true of market makers?
A. Commercial banks are not allowed 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.
An equity loan is made when _____.
a corporation pledge equities or other assets to borrow money
corporations avail cash loans from individuals
a corporation sells stock to investors
corporations issue bonds to individual investors
3
An equity loan is made when a corporation sells stock to investors. The money the corporation receives in return for its stock can be used to purchase plants and equipment, fund R&D projects, pay wages, and so on.
Which of the following statements is true of debt loans?
Management has the discretion in paying the amount to investors.
Debt loans should be repaid at regular intervals.
Returns from debt loans are variable in nature.
Corporations need not pay back the debt loans if they incur losses.
2
When an investor purchases a corporate bond, he purchases the right to receive a _____.
share of the overall revenues that the company generates
part of the title for the assets that the corporate holds
specified fixed stream of income from the corporation
share of the profits that the company generates through operations
When an investor purchases a corporate bond, he purchases the right to receive a specified fixed stream of income from the corporation for a specified number of years (i.e., until the bond maturity date).
47. An important drawback of a purely domestic capital market is that the _____.
investments does not receive protection from governments
investments are riskier than in global capital markets
market lacks a strong regulatory mechanism
cost of capital tends to be higher than it is in a global market
4
Perhaps the most important drawback of the limited liquidity of a purely domestic capital market is that the cost of capital tends to be higher than it is in a global market.
A purely domestic capital market faces the problem of _____.
foreign exchange risk
limited liquidity
lack of regulation
deregulated markets
The cost of capital is the _____.
interest received on investments made by the company
price of borrowing money
difference between cost of inputs and outputs
total value of raw materials that a company uses
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 beyond a point
D. declines rapidly in the beginning
Systematic risk refers to movements in a stock portfolio's value that are _____.
attributable to macroeconomic forces affecting an economy
specific to the firm or individuals who invest in a portfolio
attributable to factors pertaining to an individual firm
specific to the company that facilitates the investment portfolio
The relatively low correlation between the movement of stock markets in different countries indicates that _____.
diversifying a portfolio will increase the risk of investing
most countries face similar economic conditions
countries pursue different macroeconomic policies
different stock markets are not segmented from each other
The relatively low correlation between the movement of stock markets in different countries reflects that countries pursue different macroeconomic policies and face different economic conditions.
The element of risk into investing in foreign assets is more with _____ exchange rates.
floating
pegged
fixed
managed
Floating exchange rates introduce an additional element of risk into investing in foreign assets. Adverse exchange rate movements that floating rates create can transform otherwise profitable investments into unprofitable investments.
Which of the following statements is true of the use of information technology in financial services?
Information technology prevents the spread of financial crises.
Financial services do not use decisions making systems.
It does not require to process large volumes of information.
B
Which of the following is a disadvantage of the integration facilitated by technology?
Segregated international capital markets will emerge as a result of technology.
Complexity in processing large volumes of data will increase.
Shocks that occur in one financial center will spread globally.
Systems integration hinders real-time data transfer across different countries.
The integration facilitated by technology has a dark side. Shocks that occur in one financial center now spread around the globe very quickly.
Which of the following statements is true of the deregulation of financial industry?
Countries can strengthen the global capital market by encouraging strict regulations.
Financial services have historically been the most deregulated of all industries.
Deregulation helped the development of an international capital market.
Deregulation compels financial services companies to remain as domestic companies.
Financial services companies across the world have transformed and are increasingly deregulated. This has enabled financial services companies from primarily domestic companies into global operations with major offices around the world. Hence, deregulation helped the development of a truly international capital market.
Hedge funds _____.
are public investment funds that invest in corporate bonds and shares
make long bets rather than short bets
are investment funds managed by the government
make short bets on assets that they think will decline in value
Analysts who believe globalization of capital has serious risks argue that _____.
capital does not shift in and out of countries as quickly as conditions change
individual nations are becoming more vulnerable to speculative capital
deregulation of trade is helpful for the economic growth in a country
most of the capital that moves internationally is pursuing long term gains
Some analysts are concerned that due to deregulation and reduced controls on cross-border capital flows, individual nations are becoming more vulnerable to speculative capital flows. They view globalization of capital as risky.
Which of the following is a disadvantage of global capital market?
Foreign investments may be driven by speculative flows in the market.
A truly global market reduces the liquidity of investments.
The availability of capital is low in a global capital market.
The cost of capital is more in a global market than a domestic market.
Which of the following is a reason why the global capital market is increasingly becoming speculative?
A global market reduces the liquidity of investments and increases the chances of incurring losses.
Investments in the global capital market are faced with a lack of quality information.
Investments in the global capital market are not conducive to
diversification.
The cost of capital is more in a global market and this increases the level of risk associated with it.
A Eurocurrency is any currency _____.
banked outside of its country of origin
that is traded in European countries
that originates in European countries
used to buy gold and related commodities
A Eurocurrency is any currency banked outside of its country of origin. Eurodollars, which account for about two-thirds of all Eurocurrencies, are dollars banked outside of the United States.
62. Eurodollars _____.
refer to the exchange value of dollar with Euro
are used to pay for imports from Europe
are dollars banked outside of the United States
refer to the exchange buffer that Euro has against dollar
C
Eurodollars are dollars banked outside of the United States. They account for about two-thirds of all Eurocurrencies.
Which of the following statements is true of Eurocurrency?
Eurocurrency market is a relatively high-cost source of funds.
It is produced and banked within European countries.
It is used only for internal transactions within European Union.
A Eurocurrency is any currency banked outside of its country of origin. Eurocurrency can be created anywhere in the world.
The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is that it _____.
is separated from the foreign exchange market
lacks government
regulation
is associated with low-risk
gives high levels of investor protection
The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation. This allows banks to offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency. The lack of regulation also allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency.
Banks offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency because Eurocurrency deposits _____.
are funded by the European union
lack government
regulations
are associated with low risk
have minimum foreign exchange risk
The Eurocurrency market lacks government regulation. This allows banks to offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency, making Eurocurrency deposits attractive to those who have cash to deposit.
Which of the following is an advantage that banks have when they deal with foreign currencies?
Interest payments to customers are low when dealing with foreign currencies.
Accounts need not be maintained when dealing with foreign currencies.
Risks that investors face are low when dealing with foreign currencies.
Governments give banks more freedom when dealing with foreign currencies.
Banks are given more freedom in their dealings in foreign currencies. For example, the British government does not impose reserve requirement restrictions on deposits of foreign currencies within its borders.
When using the Euromarkets, companies _____.
have funds that lack liquidity
pay less for the loans
attract low interest rates
are secured from foreign exchange risks
Which of the following is a drawback of the Eurocurrency market?
Increased governmental controls
High reserve ratio requirements
Low interest rates on deposits
Exposure to foreign exchange risk
Borrowing funds internationally can expose a company to foreign exchange risk. This is a major drawback of the Eurocurrency market.
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.
The most common kind of bond is a fixed-rate bond. The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs. Each year until the bond matures, the investor gets an interest payment and then at maturity he gets back the face value of the bond.
_____ are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued.
Micro bonds
Eurobond s
Foreign bonds
Regulatory bonds
Which of the following statements is true of foreign bonds?
A. Such bonds must be underwritten by an international syndicate of banks.
B. Foreign bonds are placed only in the originating country. C. Foreign bonds are issued by governments rather than corporations.
D. Such bonds are denominated in the issuing country's currency.
United States sells bonds that are denominated in dollars in Europe. This is an example of a _____ bond.
foreign
Euro
micro
regulatory
_____ 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.
Eurobonds
Eurobonds are normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated. Eurobonds are routinely issued by multinational corporations, large domestic corporations, sovereign governments, and international institutions.
Eurobonds are _____.
denominated in the currency of the country in which they are issued
normally underwritten by an international syndicate of banks
denominated in a currency that is accepted by the European Union
are sold outside the borrower's county with reference to the originating currency
An Italian corporation issues a bond denominated in dollars. This is an example of a _____.
foreign bond
Eurobond
micro bond
regulatory bond
Which of the following is a factor that makes Eurobonds more attractive than most major domestic bonds?
Presence of a regulatory interference
Strong disclosure requirements
Favorable tax status
Protection from exchange risks
A favorable tax status is one of the features of the Eurobond market that make it an appealing alternative to most major domestic bond markets.
_____ separated national equity markets from each other historically.
Substantial regulatory barriers
Fixed exchange rates
Financial
similarities
Desire for high levels of profit
Historically substantial regulatory barriers separated national equity markets from each other. Not only was it often difficult to take capital out of a country and invest it elsewhere, but corporations also frequently lacked the ability to list their shares on stock markets outside of their home nations.
When value of U.S. dollars goes down, _____.
bonds that are denominated in dollar will produce more returns
foreign depositors in the U.S will benefit
foreign borrowers will garner benefits
investors tend to favor bonds that are denominated in dollar
Movements in foreign exchange rates can substantially increase the cost of foreign currency loans. In this case, the value of the loan goes down and the borrowers have to pay less.
ABB Bank is a financial corporation located in England and uses euro as its official currency. The company borrows 1 million U.S. dollars from a bank based in United States. ABB will be at a disadvantage if _____.
Euro appreciates against all currencies
U.S. dollar appreciates against Euro
U.S. dollar depreciates against Euro
fixed exchange rates are used for the transaction
Movements in foreign exchange rates can substantially increase the cost of foreign currency loans. In this case, the cost of the loan will go up if U.S. dollar appreciates against Euro. This will be disadvantageous to ABB Bank.
80. _____ can inject risk into foreign currency borrowing.
Movements in exchange rates
Use of fixed-exchange rates
Issue of domestic bonds
Use of pegged exchange rates
A
Unpredictable movements in exchange rates can inject risk into foreign currency borrowing, making something that initially seems less expensive ultimately much more expensive.
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