Chapter 12 The Global Capital Market

Market makers are

financial service companies that connect investors and borrowers

A(n) _______ brings together those who want to invest money and those who want to borrow money

Capital market

Which of the following are among the best examples of market makers?

Commercial banks

Identify the incorrect statement pertaining to commercial banks

They bring investors and borrowers together but do not charge commissions for it

An equity loan

Is made when a corporation sells stock to investors

Identify the incorrect statement regarding debit loans

They are made when a corporation sells stock to investors and gives its holders a claim to the firm's profit stream

All of the following are benefits of global capital markets, except that they

Have higher cost of capital as compared purely domestic capital markets

The cost of capital

Is the price of borrowing money, which is the rate of return that borrowers must pay investors

Which of the following is not likely to be a reason for investors to use the global capital market?

They have a higher cost of capital as compared to purely domestic capital market

As an investor increases the number of stocks in her portfolio, the portfolio's risk:

declines rapidly in the beginning

_______ 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

Systematic risk

Systematic risk

Is the level of non-diversifiable risk is an economy

The relatively low correlation between the movements of stock markets in different countries reflects all of the following basic factors except

Barriers to crossborder capital flows drastically increase the ability of capital to roam the world
freely in search of the highest riskadjusted return

Which of the following statements regarding barriers to cross-border capital flows is not true?

They are no longer responsible for the relatively low correlation between the movements of
stock markets in different countries

According to a study by Bruno Solnik

A fully diversified portfolio that contains stocks from many countries is less than half as risky
as a fully diversified portfolio that contains only U.S. stocks

All of the following statements regarding the effects of exchange rates on international portfolio diversification are true, except

The volatile exchange rates associated with the current floating exchange rate regime increase
the riskreducing effects of international portfolio diversification

According to data from the Bank for International Settlements

The global capital market is growing at a rapid pace

Which of the following statements about the financial services industry is not true?

It saw the real cost of recording, transmitting and processing information increase by 25 percent between 1964 and 1990

In the financial services industry, growth of international communications technology has facilitated all of the following except

The emergence of a segregated international capital market

The international capital market boom in the 1980s, 1990s, and 2000s can be attributed to the

Advances in information technology

Which of the following is an adverse effect of the integration of international capital
market facilitated by technology?

Shocks" that occur in one financial center now spread around the globe very quickly

The global trend toward the deregulation of financial markets has been facilitated by all of the following developments, except

Increasing rejection of the free market ideology associated with an individualistic political philosophy

In late 1997, a deal brokered by the _________ removed many of the restrictions on cross-border trade in financial services and facilitated further growth in the size of the global capital market

World Trade Organization

Which of the following is not a trend toward deregulation that facilitated the growth of the international capital market?

Restrictions on the entry of foreign securities houses in Japan and Japanese banks not being
allowed to open international banking facilities

Analysts who believe that the globalization of capital has serious inherent risks argue that

Due to deregulation and reduced controls on crossborder capital flows, individual nations are becoming more vulnerable to speculative capital

According to Harvard economist Martin Feldstein, "patient money

Is still relatively rare

According to Harvard economist Martin Feldstein ________ supports long-term cross-border capital flows

Patient money

Economist Martin Feldstein argues that the lack of patient money is due to the

Relative paucity of information that investors have about foreign investments

A(n) _______ is any currency banked outside of its country of origin

Eurocurrency

A eurocurrency

Can be created anywhere in the world

Which event was initially responsible for London becoming the leading center of eurocurrency trading?

Prohibition of British banks from lending British pounds to finance non-British trade

The main factor that makes the eurocurrency market attractive to both depositors and borrowers is that

It lacks government regulation and banks are given much more freedom in their dealings in foreign currencies

A bank based in New York faces a 10 percent reserve requirement, has annual operating
costs of $1 per $100 of deposits and it charges 10 percent interest on loans. The highest interest
this bank can offer to a depositor, making a $100 deposit and still co

9

Which of the following is a drawback of the eurocurrency market

It exposes a company to foreign exchange risk

Which of the following is a drawback of the eurocurrency market?

Probability of failure resulting in loss of deposits

Why do many companies borrow funds in their domestic currency even though the eurocurrency markets may offer more attractive interest rates?

To avoid foreign exchange risk

_________ are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued

Foreign bonds

These are international bonds, normally underwritten by international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated

Eurobonds

All of the following are features of the eurobond market that make it an appealing alternative to most major domestic bond markets, except

Ability to offer to residents of the country, in whose currency they are denominated

Companies with historic roots in one nation are broadening their stock ownership by
listing their stock in the equity markets of other nations because of all of the following reasons,
except

It helps in decreasing the company's visibility with local employees, customers, suppliers and
bankers