BA 324 - Introduction to Finance

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Capital Markets - Review

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1) Evidence of how global markets are linked was provided in 1997 and 1998 when international markets reacted to the collapse of Asian currencies in Thailand, Indonesia, Malaysia and Koreaand, and Russia's default on its sovereign debt.

2) When global capital markets collectively react to international events like Russia's default on its sovereign debt, it is common to find an impact on the ability to raise capital.

3) The European Monetary Union (EMU) which came into effect in January of 1999 includes the establishment of a new European Central Bank to coordinate monetary policy for the Euro-zone countries.

4) The European Monetary Union (EMU) which came into effect in January of 1999 includes the establishment of a new European Central Bank to coordinate monetary policy for the Euro-zone countries.

5) During the next ten years, the major threat to the dominance of the U.S. money and capital markets will come from Russia's difficulty in transforming its economy into a capitalistic one, Japan's prolonged recession and banking crisisTh, and the Euro-zone countries comprising the European Monetary Union and a single currency.

6) Global capital markets are influenced by interest rates, investor confidence, and relative economic growth.

7) Companies list their stock around the globe to capitalize on the inefficiency inherent in foreign markets, increase liquidity for their stockholders, and provide opportunities for the sale of new stock in foreign countries.

8) Foreign investors have preferred to invest in the United States due to political stability of the U.S. government and the U.S. dollar is the world's international currency.

9) With respect to the United States and its relationship with the rest of the world, it can be said that foreign investors hold large positions in U.S. government securities.

10) Financial instruments in the capital markets generally fall under what category in the Balance Sheet long-term liabilities and equities.

11) Corporations prefer bonds over preferred stock for financing their operations because the after-tax cost of debt is less than the cost of preferred stock.

12) In general when interest rates are expected to rise, financial managers A. try to lock in long-term financing at low cost.

13) Federally sponsored credit agencies include all but which of the following? A. Securities Investor Protection Corporation (SIPC).

14) Cash flow from depreciation (tax shield) is an internal source of funds.

15) The major supplier of funds for investment in the whole economy is households.

16) Financial intermediaries serve the purposes of financial intermediaries allow for indirect investment in the capital markets by households, aid in the flow of funds through the economy, and help provide allocation of funds to the best investments.

17) Examples of indirect investment by a household are investment in a mutual fund's shares, investment in life insurance, and avings deposit in a commercial bank.

18) Abenefit of financial intermediaries is to increase market liquidity.

19) The purpose of secondary trading is to provide liquidity and competition between investments.

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

21) The NYSE is known as the most liquid

22) Middle to small size companies that are centered in one city or state would most likely be found on the NASDAQ Small Cap Market.

23) Dual Trading the type of trading accounts for over 90% of stocks traded on the Chicago and Pacific regional exchanges

24) The emergence of trading via ECNs haslowered the cost of trading.

25) Computerized handling of transactions is not a criterion for an efficient market.

26) Security markets are efficient when each of the following exist except A. security prices follow the leading indicators such as the DJIA very closely.

27) The efficient market hypothesis deals primarily with the degree to which prices adjust to new information.

28) The efficient market hypothesis has several forms. The weak form states that past price data is unrelated to future prices.

29) Security markets provide liquidity by creating a market in which owners may easily turn an investment into cash through its sale.

30) The semi-strong form of the efficient market hypothesis states that prices reflect all public information.

31) The increased importance of international capital markets are the result of increased privatization and capitalism, development of international "free trade", and lower telecommunications costs.

32) The strong form of the efficient market hypothesis states that all information both public and private is immediately reflected in stock prices.

33) The Securities Act of 1933 is primarily concerned with original issues of securities.

34) The Securities Act of 1933 requires that all securities sold in more than one state be registered with the SEC, holding corporate officers liable for losses for those who were misled by false information in the prospectus, and requiring a prospectus for all new issues of securities which contains all information appearing in the registration statement.

35) The Securities Exchange Act of 1934 is primarily concerned with regulation of organized exchanges.

36) Security markets are affected by interest rates, global crises, and emotions.

37) Financial intermediaries include commercial banks, life insurance companies, and pension plans.

38) The purposes of security legislation include protection against fraud, ensuring market efficiency, and reducing insider trading>

39) The belief in the efficient market hypothesis would lead to an increase in index funds.

40) The Sarbanes-Oxley Act of 2002 holds the CFO legally accountable for the accuracy of their firm's financial statements.

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

42) Markets are efficient when prices adjust rapidly to new information, continuous markets exist and large dollar trades can be absorbed without large price movements.

43) NASD regulates stock brokers and brokerage firms.

44) Regional Exchanges are primarily engaged in dual trading activities, although some local stocks are listed on regional exchanges only.

45) 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.

46) The NASDAQ National Market is composed of large nation-wide companies that are traded in the over-the-counter market.

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

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

49) Internal funds generated by corporations include retained earnings and non cash expenses such as depreciation and deferred taxes.

50) 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.

51) The dollar value of common stock issuances exceeds the level of preferred stock issuances and corporate bond issuances.

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

53) Municipal securities are called tax exempt because no federal taxes must be paid on interest received.

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

55) Capital markets are becoming increasingly international as investors and issuers seek out the best risk-return opportunities.

56) The capital structure of the firm consists of long-term debt and equity.

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