Chapter 14 – Capital Markets
1. The European Central Bank issues bonds, notes, and bills denominated in the new Euro
currency.
2. The European Monetary Union (EMU) 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 eleven
countries.
Chapter 14 – Capital Markets
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.
Chapter 14 – Capital Markets
6. Money markets are the simplest form of capital markets because they involve trading in
U.S. dollars.
7. Short-term markets that are composed of securities with maturities of less than one month
are referred to as money markets.
8. The Euro is the only official currency in the Euro-zone; it has liquidity and size second
only to the U.S. dollar.
Chapter 14 – Capital Markets
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 US has invested substantially more in foreign countries than foreign
countries have invested back in the US.
12. Corporations tend to shift from debt financing to equity financing during bull markets.
Chapter 14 – Capital 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. In the new issues market for corporate capital, common stocks account for the largest
percentage of new funds raised.
Chapter 14 – Capital Markets
17. Federal government agency issues, though backed directly by the U.S. Treasury, are
deemed substantially more risky than regular government issues.
18. The capital markets serve as a way of allocating available capital to the most efficient
user.
19. The dollar value of common stock issuances exceeds the level of preferred stock issuances
and corporate bond issuances.
20. The main reason for the small amount of financing with preferred stock is that dividends
on preferred stock are not tax deductible as are interest paid on bonds.
Chapter 14 – Capital Markets
21. Retained earnings account for the majority of internally generated corporate funds.
22. When an investor buys stock in the stock market, he is purchasing shares from a
company.
23. Internal funds generated by corporations include retained earnings and non cash expenses
such as depreciation and deferred taxes.
24. Securities issued by states and municipalities are referred to as statutory bonds and
municipal bonds, respectively.
Chapter 14 – Capital Markets
25. Households and the government are mainly considered to be suppliers of funds while
corporations are generally considered users of funds.
26. Financial intermediaries channel funds into the capital markets from the household sector.
27. The highest supplier of funds to the U.S. credit markets were foreign investors.
28. The major suppliers of funds to the U.S. credit markets were foreign suppliers, mutual
funds, and federal, state and local governments.
Chapter 14 – Capital Markets
29. Without financial intermediaries the cost of funds would be about the same as with
financial intermediaries.
30. Financial intermediaries help eliminate inefficiencies such as indirect investment by
households.
31. Brokers on an organized stock exchange act as an agent for the person buying or selling
securities.
32. Brokers actually own the securities they buy and sell on the floor of the exchange.
Chapter 14 – Capital Markets
33. The NASDAQ National Market is composed of large nation-wide companies that are
traded in the over-the-counter market.
34. The NYSE purchased Archipelago (an ECN) in 2005 in order to expand its floor-trading
capabilities.
35. The NASDAQ Small-Cap Market is composed of smaller, regionally based companies
that often remain controlled by their founders so that few shares are available.
36. Regional Exchanges are primarily engaged in dual trading activities, although some local
stocks are listed on regional exchanges only.
Chapter 14 – Capital Markets
37. NASDAQ market is the primary market for international securities.
38. NASD regulates stock brokers and brokerage firms.
39. A key variable of market efficiency is the certainty of the income stream. The most
efficient market is for corporate securities.
40. The strong form of the efficient market hypothesis states that prices reflect all public
information.
41. The efficient market hypothesis is generally concerned with the impact of information on
the behavior of stock prices.
Chapter 14 – Capital Markets
42. Due to a lack of certainty concerning their income stream, fixed-income securities trade in
relatively inefficient markets.
43. The weak form of the efficient market hypothesis states that an investor can profit by
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.
Chapter 14 – Capital Markets
46. Commission rates for stock transactions are fixed as a result of the Securities Act
Amendments of 1975.
47. The Sarbanes-Oxley Act of 2002 holds the CEO legally accountable for the accuracy of
their firm’s financial statements.
48. The Sarbanes-Oxley Act of 2002 holds the 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.
Chapter 14 – Capital Markets
50. The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from
fraudulent activities.
51. The 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, if there are no sell orders, 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.
Chapter 14 – Capital Markets
54. Many attribute the banking crisis of 2008-2009 with problems in the futures markets.
55. 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, retain earnings decline as a percent of internal funds.
Chapter 14 – Capital Markets
58. 2008 was a unique year in the credit markets because the leader, in traditional times,
provided no net new funds to credit markets.
59. One of the advantages of the BATS exchange stems from its home in Kansas.
60. A key influence in recent years has been the growth in market value of futures exchanges.
61. The majority of total dollar trading volume in 2008 took place in U.S. financial markets.