BUS 280 Chap 12

Three features of the Eurobond market make it an appealing alternative to most major domestic bond markets

An absence of regulatory interference Less stringent disclosure requirements than in most domestic bond markets A favorable tax status

Eurocurrency

Any currency banked outside its country of origin

Global capital market benefits

Borrowers and investors

Foreign bonds sold in Great Britain are

Bulldogs

Interest rate spread

Commercial Banks make a profit from the differences from paying individuals interest in return for deposits and what they lend to borrowers at a higher interest rate

Those who want to invest money include

Corporations with surplus cash, Individuals, and non bank financial institutions (pension funds, insurance companies)

The low correlation between the movement of stock markets in different countries reflects two basic factors.

Countries pursue different macroeconomic policies and face different economic conditions, so their stock markets respond to different forces and can move in different ways Some stock markets are still somewhat segmented from each other by capital controls- that is, by restrictions on cross-border capital flows

When the US allowed foreign banks to enter the US capital market and domestic banks to expand their operations overseas in the late 1970s, it was due to

Deregulation

Maria's company sells stock to investors. What type of capital market loan is this?

Equity

Any currency banked outside its country of origin

Eurocurrency

What accounts for about two-thirds of all Eurocurrencies

Eurodollars

An integrated international capital market is more volatile compared to a nonintegrated market T/F

False

Global markets are strongly correlated, allowing investors to reduce risk by diversifying their portfolio internationally T/F

False

Problems of limited liquidity are limited to less developed nation, which tend to have smaller domestic capital markets t/f

False

The global capital market limits the opportunity for businesses and individuals to build a diverse financial portfolio t/f

False

Have been the most tightly regulated of all industries

Financial service

Market makers

Financial service companies that connect investors and borrowers, either directly or indirectly Commercial banks e.g. Citi, U.S. Bank and investment banks e.g. Goldman sachs

Money market

Financial services companies that connect investors and borrowers

The most common kind of bond is

Fixed-bond

Those who want to borrow money include

Individuals, companies, and governments

Two factors that helped global capital markets take off in the last decade of the 20th century were

Information technology and deregulation by government

Hedge funds

Investment funds that not only buys financial assets (stocks, bonds, currencies) but also sells them short 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

The most significant consequences of using the global capital market

Investors can diversify their portfolios internationally, thereby reducing their risk to less than what could be achieved in a purely domestic capital market

Regulations ensures that banks have enough what to satisfy demand if large numbers of domestic depositors should suddenly decide to withdraw their money

Liquid funds

When a company is starting up, it likely needs borrow startup funds. A key advantage of borrowing from global capital markets is that

Lowers the borrower's cost of capital

Eurobonds are routinely issued by

Multinational corporations, large domestic corporations, sovereign government, and international institutions

One attraction of the Eurobond market

No translation exposure

Eurobonds

Normally underwritten by an international syndicate of banks and place in counties other than the one in whose currency the bond is denominated

The function of a capital market is to

Provide sellers of capital goods a way to find potential buyers

The Big Bang that occurred in Great Britain was the name given to the start of

Removed barriers leading to deregulation

Foreign bonds sold in Japan are

Samurai bond

Foreign bonds

Sold outside the borrower's country and are dominated in the currency of the country in which they are issued

Difference between translation and transaction exposure

Transaction exposure involves the risk when a business transaction is arranged in a foreign currency, the value of that currency may change before the transaction is complete. Should the foreign currency appreciate, it will cost more in the business' home currency. Translation risk focuses on the change in a foreign held asset's value based on a change in exchange rate between the home and foreign currencies

Harvard economist Martin Feldsein has argued that owners and mangers tend to keep long-term investments at home and speculate with "hot money" in foreign markets t//f

True

The Eurocurrency market has two drawbacks

When depositors use a regulated banking system, they know that the probability of bank failure that would cause them to lose their deposits is very low Borrowing funds internationally can expose a company to foreign exchange risk

Foreign bonds sold in the United states are

Yankee bonds

Global capital market investors have

a much wider range of investment opportunities than in a purely domestic capital market

The information gap that investors face is further complicated by the differences in what

accounting conventions, which makes the analysis of cross-border investments opportunities challenging

The term Eurocurrency is actually a misnomer because a Eurocurrency can be created

anywhere in the world

An investment bank is a type of

direct performer in a capital market

A borrower can hedge against unpredictable movements in foreign exchange rates that can make the global capital market riskier by

entering into a forward contract

According to data from the Bank of International Settlements, the global capital market is

growing at a rapid pace, driving the growth advances in information technology and deregulation by governments

One of the consequences of the global financial crisis of 2008 and 2009 for hedge funds, which are private investment funds was a

growing concern that deregulation had gone too far

A global capital market benefits borrowers by lowering the cost of capital and

increasing the supply of funds available for borrowing

A global capital market benefits borrows by

increasing the supply of funds available for borrowing and by lowering the cost of capital

Domestic currency deposits are regulated in all

industrialized countries

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

its lack of government regulation

According to Bruno Solnik's classic study, a fully diversified portfolio that contains stocks from many countries is

less than half as risky as a fully diversified portfolio and contains only US stocks

Studies have shown that the stock markets in different countries have a

low correlation

Different accounting conventions can make the problem of lack of information about the quality of foreign investments by

making direct comparisons difficult

The cost of capital

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

A global capital market benefits investors by

providing a wider range of investment opportunities, thereby allowing them to build portfolios of international investments that diversify their risks

The most important drawback of the limited liquidity of a purely domestic capital market is

the cost of capital tends to be higher than it is in a global market

Investors using the global capital market have a wider range of investment opportunities than a purely domestic capital market. One of the most significant consequences of their choice is that

they can reduce their risk to below what could be achieved in a strictly domestic market

Feldstein argues that the lack of patient money is due

to the relative paucity of information that investors have about foreign investments, if investors had better information about foreign assets, the global capital market would work more efficiently and be less subject to short-term speculative capital flows

Feldstein claims that Mexico's economic problems in the mid-1990s were the result of

too much hot money flowing in and out of the country and too little patient money

Eurodollars account for how much of all Eurocurrencies banked outside the United States

two-thirds

Investors are able to reduce risks by diversifying an investment portfolio internationally, and the risk reduction effects would be greater if not for

volatile exchange rates associated with current floating exchange risk regime

Capital markets bring together those who

want to invest money and those who want to borrow money