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

Transcription

1 Chapter 12 The Global Capital Market True / False Questions 1. A capital market brings together those who want to invest money and those who want to borrow money. True False 2. Market makers are companies that make large investments in governmental bonds. True False 3. Commercial banks perform a direct connection function in capital markets. True False 4. An investor purchases the right to receive a specified fixed stream of income from the corporation when he purchases a share of stock. True False

2 5. 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. True False 6. Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors. True False 7. The liquidity of the market is limited in a purely domestic capital market. True False 8. The cost of capital is the difference between cost of inputs and outputs. True False 9. The cost of capital is higher in a global market than in a purely domestic capital market. True False 10. By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. True False

3 11. The risk associated with a portfolio increases as the investor increases the number of stocks in her portfolio. True False 12. Investors can reduce the level of risk by diversifying a portfolio internationally. True False 13. Systematic risk refers to the movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy. True False 14. The systematic risk is the level of diversifiable risk in an economy. True False 15. The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions. True False 16. Using floating exchange rates will help countries reduce the risk of investing in foreign assets. True False

4 17. Financial services is an information-intensive industry. True False 18. An integrated international capital market is less volatile compared to a nonintegrated market. True False 19. Hedge funds position themselves to make "long bets" on assets that they think will increase in value. True False 20. Global capital market often lack information about the fundamental quality of foreign investments. True False 21. A Eurocurrency is the currency used by the countries of the European Union. True False 22. Eurocurrency can be created anywhere in the world. True False

5 23. A factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation. True False 24. Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency. True False 25. The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates. True False 26. Eurocurrency market is characterized by lack of government regulation. True False 27. Domestic currency deposits are regulated in most industrialized countries. True False 28. Governments give banks less freedom when they deal in foreign currencies. True False

6 29. Companies receive a higher interest rate on deposits and pay less for loans when using the Eurocurrency market. True False 30. Depositors are not protected against bank failures in the Eurocurrency market. True False 31. Investors who purchase a fixed-rate bond receive cash payoffs only at maturity. True False 32. Foreign bonds are sold within the borrower's country and are denominated in the currency of the country in which they are issued. True False 33. Foreign bonds sold in the United States are called bulldogs. True False 34. Eurobonds are usually offered to residents of the country in whose currency they are denominated. True False

7 35. Eurobonds are normally underwritten by an international syndicate of banks. True False 36. Government limitations are more severe for securities denominated in foreign currencies than for domestic securities. True False 37. Eurobonds fall within the regulatory domain of European Economic Community. True False 38. Historically substantial regulatory barriers separated national equity markets from each other. True False 39. 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. True False 40. Borrowers can hedge against foreign exchange risks by entering into a forward contract. True False

8 Multiple Choice Questions 41. 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 42. 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

9 43. 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. 44. 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 45. 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.

10 46. 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 47. An important drawback of a purely domestic capital market is that the. A. investments 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 48. A purely domestic capital market faces the problem of. A. foreign exchange risk B. limited liquidity C. lack of regulation D. deregulated markets

11 49. 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 50. 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 51. 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

12 52. 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. different stock markets are not segmented from each other 53. The element of risk into investing in foreign assets is more with exchange rates. A. floating B. pegged C. fixed D. managed 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 is an information-intensive industry. C. Financial services do not use decisions making systems. D. It does not require to process large volumes of information.

13 55. Which of the following is a disadvantage of the integration 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. 56. Which of the following statements is true of the deregulation of 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. 57. 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

14 58. 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 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 59. Which of the following is a disadvantage of 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. 60. Which of the following is a reason why the global capital market is increasingly becoming speculative? A. A global market reduces the liquidity of investments and increases the chances of incurring losses. B. Investments in the global capital market are faced with a lack of quality information. C. Investments in the global capital market are not conducive to diversification. D. The cost of capital is more in a global market and this increases the level of risk associated with it.

15 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 62. Eurodollars. A. refer to the exchange value of dollar with Euro B. are used to pay for imports from Europe C. are dollars banked outside of the United States D. refer to the exchange buffer that Euro has against dollar 63. Which of the following statements is true of Eurocurrency? A. 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.

16 64. 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 65. 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 66. Which of the following 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.

17 67. When using the Euromarkets, companies. A. have funds that lack liquidity B. pay less for the loans C. attract low interest rates D. are secured from foreign exchange risks 68. Which of the following is a drawback of the Eurocurrency market? A. Increased governmental controls B. High reserve ratio requirements C. Low interest rates on deposits D. Exposure to foreign exchange risk 69. 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.

18 70. 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 71. 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. 72. United States sells bonds that are denominated in dollars in Europe. This is an example of a bond. A. foreign B. Euro C. micro D. regulatory

19 73. 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 74. Eurobonds are. A. denominated in the currency of the country in which they are issued B. normally underwritten by an international syndicate of banks C. denominated in a currency that is accepted by the European Union D. are sold outside the borrower's county with reference to the originating currency 75. An Italian corporation issues a bond denominated in dollars. This is an example of a. A. foreign bond B. Eurobond C. micro bond D. regulatory bond

20 76. Which of the following is a factor that makes Eurobonds more attractive than most major domestic bonds? A. Presence of a regulatory interference B. Strong disclosure requirements C. Favorable tax status D. Protection from exchange risks 77. separated national equity markets from each other historically. A. Substantial regulatory barriers B. Fixed exchange rates C. Financial similarities D. Desire for high levels of profit 78. When value of U.S. dollars goes down,. A. bonds that are denominated in dollar will produce more returns B. foreign depositors in the U.S will benefit C. foreign borrowers will garner benefits D. investors tend to favor bonds that are denominated in dollar

21 79. 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. A. Euro appreciates against all currencies B. U.S. dollar appreciates against Euro C. U.S. dollar depreciates against Euro D. fixed exchange rates are used for the transaction 80. can inject risk into foreign currency borrowing. A. Movements in exchange rates B. Use of fixed-exchange rates C. Issue of domestic bonds D. Use of pegged exchange rates Essay Questions

22 81. What is a capital market? Define market makers. 82. Explain various types of capital market loans. 83. Explain how equity loans and debt loans differ in terms of attractiveness to businesses.

23 84. How does a global capital market, as compared to a purely domestic market, benefit investors? 85. What are the advantages of global capital market in comparison with a purely domestic capital market?

24 86. What is systematic risk? 87. Explain the changes observed in the risk of investments when an investor increases the number of stocks in her portfolio.

25 88. Explain the two basic factors reflected by the relatively low correlation between the movements of stock markets in different countries. 89. Briefly describe the trends observed in the global deregulation of financial services.

26 90. Identify the risks associated with global capital markets. 91. What is a Eurocurrency? 92. What are the financial advantages that make the Eurocurrency market attractive to both depositors and borrowers?

27 93. What are the drawbacks of the Eurocurrency market? 94. Describe a fixed-rate bond. 95. What are foreign bonds?

28 96. Explain Eurobonds with an example. 97. Describe the factors that make the Eurobond market attractive. 98. Write a brief note on foreign exchange risks and the cost of capital.

29 99. How can a borrower hedge against unpredictable movements in exchange rates? 100. How does the growth in the global capital markets affect investing firms?

30 Chapter 12 The Global Capital Market Answer Key True / False Questions 1. 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

31 2. 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 3. Commercial banks perform a direct connection function in capital markets. FALSE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

32 4. An investor purchases the right to receive a specified fixed stream of income from the corporation when he purchases a share of stock. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 5. 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. TRUE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

33 6. Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors. TRUE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 7. The liquidity of the market is limited in a purely domestic capital market. TRUE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market.

34 Topic: Benefits of the Global Capital Market 8. The cost of capital is the difference between cost of inputs and outputs. FALSE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 9. The cost of capital is higher in a global market than in a purely domestic capital market. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

35 10. By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. TRUE By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 11. The risk associated with a portfolio increases as the investor increases the number of stocks in her portfolio. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

36 12. Investors can reduce the level of risk by diversifying a portfolio internationally. TRUE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Attractions of the Global Capital Market 13. Systematic risk refers to the movements in a stock portfolio's value that are attributable to macroeconomic forces affecting all firms in an economy. TRUE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

37 14. The systematic risk is the level of diversifiable risk in an economy. FALSE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 15. The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions. TRUE 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

38 16. Using floating exchange rates will help countries reduce the risk of investing in foreign assets. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market 17. Financial services is an information-intensive industry. TRUE 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. Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

39 18. An integrated international capital market is less volatile compared to a nonintegrated market. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market 19. Hedge funds position themselves to make "long bets" on assets that they think will increase in value. TRUE 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. Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

40 20. Global capital market often lack information about the fundamental quality of foreign investments. TRUE 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. Learning Objective: Understand the risks associated with the globalization of capital markets. Topic: Benefits of the Global Capital Market 21. A Eurocurrency is the currency used by the countries of the European Union. FALSE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market

41 22. Eurocurrency can be created anywhere in the world. TRUE Eurocurrency can be created anywhere in the world. The persistent Euro- prefix reflects the European origin of the market. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market 23. A factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation. TRUE The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation. Blooms: Understand Difficulty: 2 Medium Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market

42 24. Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency. TRUE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market

43 25. The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market 26. Eurocurrency market is characterized by lack of government regulation. TRUE The main factor that makes the Eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.

44 Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market 27. Domestic currency deposits are regulated in most industrialized countries. TRUE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market 28. Governments give banks less freedom when they deal in foreign currencies. FALSE Banks are given much more freedom in their dealings in foreign currencies. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market

45 29. Companies receive a higher interest rate on deposits and pay less for loans when using the Eurocurrency market. TRUE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market 30. Depositors are not protected against bank failures in the Eurocurrency market. TRUE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market.

46 Topic: The Eurocurrency Market 31. Investors who purchase a fixed-rate bond receive cash payoffs only at maturity. FALSE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Bond Market 32. Foreign bonds are sold within the borrower's country and are denominated in the currency of the country in which they are issued. FALSE Foreign bonds are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market.

47 Topic: The Global Bond Market 33. Foreign bonds sold in the United States are called bulldogs. FALSE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Bond Market 34. Eurobonds are usually offered to residents of the country in whose currency they are denominated. FALSE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market.

48 Topic: The Global Bond Market 35. Eurobonds are normally underwritten by an international syndicate of banks. TRUE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Bond Market 36. Government limitations are more severe for securities denominated in foreign currencies than for domestic securities. FALSE Government limitations are generally less stringent for securities denominated in foreign currencies and sold to holders of those foreign currencies. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Bond Market

49 37. Eurobonds fall within the regulatory domain of European Economic Community. FALSE 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Bond Market 38. Historically substantial regulatory barriers separated national equity markets from each other. TRUE Historically substantial regulatory barriers separated national equity markets from each other. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Global Equity Market

50 39. 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. FALSE 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Understand how foreign exchange risks impacts upon the cost of capital. Topic: Foreign Exchange Risk and the Cost of Capital 40. Borrowers can hedge against foreign exchange risks by entering into a forward contract. TRUE 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. Learning Objective: Understand how foreign exchange risks impacts upon the cost of capital. Topic: Foreign Exchange Risk and the Cost of Capital

51 Multiple Choice Questions 41. 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 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

52 42. 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 Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. Market makers act between investors and borrowers. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

53 43. 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. Market makers are the financial service companies that connect investors and borrowers, either directly or indirectly. Market makers act between investors and borrowers. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

54 44. 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 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

55 45. 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. 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

56 46. 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 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). Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

57 47. An important drawback of a purely domestic capital market is that the. A. investments 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 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

58 48. A purely domestic capital market faces the problem of. A. foreign exchange risk B. limited liquidity C. lack of regulation D. deregulated markets 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

59 49. 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 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

60 50. 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 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

61 51. 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 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

62 52. 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. 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

63 53. The element of risk into investing in foreign assets is more with exchange rates. A. floating B. pegged C. fixed D. 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. Learning Objective: Describe the benefits of the global capital market. Topic: Benefits of the Global Capital Market

64 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 is an information-intensive industry. C. Financial services do not use decisions making systems. D. It does not require to process large volumes of information. 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

65 55. Which of the following is a disadvantage of the integration 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. The integration facilitated by technology has a dark side. Shocks that occur in one financial center now spread around the globe very quickly. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

66 56. Which of the following statements is true of the deregulation of 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. 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

67 57. 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 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. Learning Objective: Identify why the global capital market has grown so rapidly. Topic: Benefits of the Global Capital Market

68 58. 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 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 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Understand the risks associated with the globalization of capital markets. Topic: Benefits of the Global Capital Market

69 59. Which of the following is a disadvantage of 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. 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Understand the risks associated with the globalization of capital markets. Topic: Benefits of the Global Capital Market

70 60. Which of the following is a reason why the global capital market is increasingly becoming speculative? A. A global market reduces the liquidity of investments and increases the chances of incurring losses. B. Investments in the global capital market are faced with a lack of quality information. C. Investments in the global capital market are not conducive to diversification. D. The cost of capital is more in a global market and this increases the level of risk associated with it. 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. Blooms: Understand Difficulty: 2 Medium Learning Objective: Understand the risks associated with the globalization of capital markets. Topic: Benefits of the Global Capital Market

71 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 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. Learning Objective: Compare and contrast the benefits and risks associated with the Eurocurrency market; the global bond market; and the global equity market. Topic: The Eurocurrency Market