Economics Chapter 14 1 The Weak Form The Efficient Market

Chapter 14 Test Bank – Static Key

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

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

3. 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.

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

5. The “capital structure” of the firm consists of long-term debt and equity.

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

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

money markets.

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

9. Capital markets are becoming increasingly international as investors and issuers seek out the best risk–

return opportunities.

10. Upon entering the capital markets, an investor might invest in common stocks, preferred stock,

negotiable certificates of deposit, and convertible securities.

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

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

13. Municipal securities are called “tax-exempt” because no federal taxes must be paid on interest

received.

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

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

Treasury.

16. Interest rates have stayed relatively low during the 2012-2015 time frame, so more and more

companies have taken on long-term debt rather than short-term debt.

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

new funds raised.

18. Federal government agency issues, though backed directly by the U.S. Treasury, are deemed

substantially more risky than regular government issues.

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

20. The dollar value of common stock issuances exceeds the level of preferred stock issuances and

corporate bond issuances.

21. 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.

22. 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.

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

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

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

depreciation.

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

respectively.

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

generally considered users of funds.

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

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

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

state, and local governments.

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

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

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

34. The NASDAQ Market is composed of large nationwide companies that are traded in the over–the–

counter market.

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

36. 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.

37. Regional exchanges are primarily engaged in dual trading activities, although some local stocks are

listed on regional exchanges only.

38. The NASDAQ market is the primary market for international securities.

39. NASD regulates stockbrokers and brokerage firms.

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

corporate securities.

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

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

stock prices.

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

data.

44. Markets are efficient when prices adjust rapidly to new information, continuous markets exist, and large

dollar trades can be absorbed without large price movements.

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

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

1975.

47. The purpose of Securities Act Amendments of 1975 is to protect the investors by forcing companies to

reveal more relevant financial information.

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48. The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the accuracy of their

firm’s financial statements.

49. The Sarbanes-Oxley Act of 2002 holds a firm’s internal auditors legally accountable for the accuracy of

their firm’s financial statements.

FALSE

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

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

52. 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.

53. The future of the NYSE is uncertain due to their unwillingness to adapt to the increase in

internationalization and electronic trading in the markets.

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

55. The Federal National Mortgage Association buys mortgage loans from local lenders, bundles them

together, and resells them as securities.

56. Fannie Mae, Freddie Mac, and Sallie Mae are private stockholder-owned corporations whose stocks

are traded on the NYSE.

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

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

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

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60. All of these are recognized as important influences in the development of the banking crisis of 2008 and

the resulting credit crisis EXCEPT

61. Which of the following was NOT a major supplier of funds to credit markets in 2008?

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

Mexico which helped

63. When global capital markets collectively react to international events, like Russia’s default on its

sovereign debt, it is common to find

64. Which of the following is not a money market instrument?

65. The euro is

66. The formation of the European Monetary Union and its single currency Euro is expected to

67. During the next several years, the major threat to the dominance of the U.S. money and capital markets

is expected to come from

68. Global capital markets are influenced by

69. Companies list their stock around the globe to

70. Foreign investors have preferred to invest in the United States EXCEPT for which of the following

reasons?

71. With respect to the United States and its relationship with the rest of the world, it can be said that

72. Financial instruments in the capital markets generally fall under which category in the balance sheet?

73. Corporations prefer bonds over preferred stock for financing their operations because

74. In general, when interest rates are expected to rise, financial managers

75. Federally sponsored credit agencies include all but which of the following?

76. Which of the following is an internal source of funds?

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

78. Financial intermediaries serve which of the following purposes?

79. Which of the following is not an example of indirect investment by a household?

80. Which of the following are benefits of financial intermediaries?

81. The purpose of secondary trading is to

82. The most important capital markets in the world (in terms of dollar value) are located in

83. Which federally supported credit agency was established to trade student loan debt?

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84. Guidelines for insider trading require that:

85. Middle- to small-sized companies that are centered in one city or state would most likely be found on

the

86. The emergence of trading via ECNs has

87. Which of the following is NOT a criterion for an efficient market?

88. Security markets are efficient EXCEPT for when which of the following exists?

89. The efficient market hypothesis deals primarily with

90. The efficient market hypothesis has several forms. The weak form states that

91. Security markets provide liquidity

92. The “semi-strong” form of the efficient market hypothesis states that

93. The “strong” form of the efficient market hypothesis states that

94. The Securities Act of 1933 is primarily concerned with

95. The Securities Act of 1933 did not

96. Of the following efficient market hypotheses, researchers have stated that the ______ market is not

efficient.

97. The Securities Exchange Act of 1934 is primarily concerned with

98. Dark pools are considered:

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Chapter 10 Test Bank – Static Summary