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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.