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
Capital markets bring together those who want to invest money and those
who want to borrow money.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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.
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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
Difficulty: 1 Easy
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Describe the benefits of the global capital market.
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Describe the benefits of the global capital market.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-02 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Topic: Benefits of the Global Capital Market
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 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
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 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
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 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.
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market; the
global bond market; and the global equity market.
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market; the
global bond market; and the global equity 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market; the
global bond market; and the global equity market.
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 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
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.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Understand how foreign exchange risks impacts upon the cost of capital.