Foundations of Financial Management, 17e (Block)
Chapter 14 Capital Markets
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. dollar.
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 stayed relatively low during the 2012-2015 time frame, so more and more
companies took 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 size of the common stock market is larger than the size of the corporate bond market.
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 market for common stocks dominates the corporate bond markets in size.
23) 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.
24) Retained earnings account for the majority of internally generated corporate funds.
25) When an investor buys stock in the stock market, he is purchasing shares from a company.
26) Internal funds generated by corporations include retained earnings and non-cash expenses
such as depreciation.
27) Securities issued by states and municipalities are referred to as statutory bonds and municipal
bonds, respectively.
28) Households and the government are mainly considered to be suppliers of funds, while
corporations are generally considered users of funds.
29) Financial intermediaries channel funds into the capital markets from the household sector.
30) The highest suppliers of funds to the U.S. credit markets are foreign investors.
31) As interest rates begin to rise, this provides motivation for companies to issue long-term
debt.
32) The major suppliers of funds to the U.S. credit markets are foreign suppliers, mutual funds,
and federal, state, and local governments.
33) Financial intermediaries help eliminate inefficiencies such as indirect investment by
households.
34) Brokers on the organized stock exchange act as an agent for the person buying or selling
securities.
35) Brokers actually own the securities they buy and sell on the floor of the exchange.
36) The NASDAQ Market is composed of large nationwide companies that are traded in the
over-the-counter market.
37) The NYSE purchased Archipelago (an ECN) in order to expand its floor-trading capabilities.
38) 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.
39) Regional exchanges are primarily engaged in dual trading activities, although some local
stocks are listed on regional exchanges only.
40) The NASDAQ market is the primary market for international securities.
41) NASD regulates stockbrokers and brokerage firms.
42) A key variable of market efficiency is the certainty of the income stream. The most efficient
market is for corporate securities.
43) The “strong form” of the efficient market hypothesis states that prices reflect all public
information only.
44) The efficient market hypothesis is generally concerned with the impact of information on the
behavior of stock prices.
45) The weak form of the efficient market hypothesis states that an investor can profit by using
past price data.
46) Markets are efficient when prices adjust rapidly to new information, continuous markets
exist, and large dollar trades can be absorbed without large price movements.
47) The market for U.S. government securities is the most efficient in the world.
48) Commission rates for stock transactions are fixed as a result of the Securities Act
Amendments of 1975.
49) The purpose of the Securities Act of 1933 is to protect the investors by forcing companies to
reveal more relevant financial information.
50) The Sarbanes-Oxley Act of 2002 holds the CEO and CFO legally accountable for the
accuracy of their firm’s financial statements.
51) The Sarbanes-Oxley Act of 2002 holds a firm’s internal auditors legally accountable for the
accuracy of their firm’s financial statements.
52) The Sarbanes-Oxley Act of 2002 has ensured that financial executives refrain from
fraudulent activities.
53) The largest net supplier of funds is the U.S. Treasury and other agencies of the government.
54) 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.
55) The future of the NYSE is uncertain due to their unwillingness to adapt to the increase in
internationalization and electronic trading in the markets.
56) Many attribute the U.S. crisis of 2008-2009 to financial problems that happened in other
countries.