Chapter 12: The Global Capital Market
Martin Feldstein identified "patient money" as facilitating global capital markets, but Blank______ as not being beneficial to global capital market due its short-term nature chasing temporary gains.
"hot money"
What are the three major appealing features of the Eurobond market?
1. Absence of regulatory interference 2. Favorable tax status 3. Less stringent disclosure requirements
The low correlation between the movement of stock markets in different countries reflects two basic factors. What are these two factors?
1. Different stock markets are still somewhat segmented from each other by capital controls. 2. The countries pursue different macroeconomic policies and face different economic conditions.
What are two drawbacks of the Eurocurrency market?
1. Foreign exchange rate risk 2. Higher probability of bank failure
What two benefits do global capital markets provide to investors and borrowers?
1. Increases the supply of funds for borrowers 2. Increases the investment opportunities for investors
What are the two reasons given for the rapid growth of the global capital market?
1. growth in information technology 2. government deregulation
The global equity markets allow firms to do which three activities?
1. list stock on multiple exchanges 2. raise funds by issuing equity or debt globally 3. attract capital from international investors
What are two reasons a company might choose to broaden their stock ownership by listing their stock on a foreign market?
1. might be a prelude to issuing stock in that market to raise capital 2. might be used as a way to facilitate future acquisitions of foreign companies
Which two groups would issue eurobonds?
1. multinational corporations 2. sovereign governments
What are the two main characteristics of a foreign bond?
1. sold outside the borrower's country 2. denominated in issuing country's currency
Regulatory barriers to national equity markets initially began to fall during the Blank______.
1980s
According to a classic study by Solnik, a fully diversified US portfolio is about Blank______ as risky as a typical individual stock.
27%
What is considered the "dark side" of technological advancements in global capital markets?
A financial crisis that occurs in one center spreads quickly around the globe.
How do borrowers and investors view a global capital market?
Both borrowers and investors consider it a benefit.
______ banks perform an indirect connection function by taking cash deposits from investors and paying them interest, and then lending money to borrowers charging them interest.
Commercial
What financial institution takes cash deposits and then lends to borrowers?
Commercial bank
In order to avoid reserve requirement restrictions, a bank would want to deposit in a Blank______ bank.
Euro
Any currency banked outside of its country of origin is a Eurocurrency. Which currency makes up about two-thirds of all Eurocurrencies?
Eurodollar
True or False: A Eurocurrency is a currency that is banked only in Europe.
False
Which statement accurately describes a feature of the Eurobond market?
It has a favorable tax status.
Which statement accurately depicts the current growth of the global capital market?
It is growing quickly.
What is the main factor that makes Eurocurrency markets attractive to both borrowers and depositors?
Lack of government regulation
Capital controls can affect the correlation between the movement of stock markets in different countries. What is an example of a capital control?
Limits on the amount of a firm's stock that a foreigner can own
Studies have shown that the stock markets in different countries have a _____ (high or low?) correlation.
Low
Besides financial advantages, what is another factor that led to growth of the Eurocurrency markets?
Political events
Recently, what has occurred in the efforts toward harmonizing differences in national accounting standards?
There has been rapid movement toward harmonization.
What is an accurate description of the correlation between the movement of stock markets in the world's four largest equity markets?
There is a low correlation between the movement of stock markets in the world's four largest equity markets.
How are hedge funds regulated?
They operate largely out of existing regulatory boundaries.
True or False: A British firm can borrow money from domestic sources or go to the global capital markets. The interest rates will probably be lower in the global capital markets because of the higher pool of funds.
True
True or False: Global markets are not strongly correlated, allowing investors to reduce risk by diversifying their portfolio internationally.
True
True or false: Bruno Solnik's studies show that portfolios with stock from many countries are less risky than portfolios containing only US stocks.
True
True or false: Eurobonds are not within the regulatory domain of any single nation.
True
True or false: There is a favorable tax treatment for owners of Eurobonds because they are not subject to income tax.
True
True or false: When depositors use an unregulated banking system such as the Eurocurrency market, the probability of bank failure is greater than in a regulated system.
True
True or false: With the advancement of technology, when a "shock" occurs in one financial center, it tends to spread quickly around the globe.
True
Which statement accurately depicts how volatile exchange rates affect the international capital market?
Volatile exchange rates create uncertainty which might act as a brake on the growth of the international capital market.
How do volatile floating exchange rates affect investments in foreign assets?
Volatile floating exchange rates create additional risk.
Within the Eurocurrency market, banks can offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency. What makes this possible?
a lack of government regulation
The information gap that international investors face is further complicated by the differences in Blank______ conventions, which makes the analysis of cross-border investments opportunities challenging.
accounting
Capital markets match large corporations who want to invest their surplus cash with individuals who want to Blank______.
borrow money
What is an example of a market maker within a capital market?
commercial bank
One result of the trend toward international equity investment is the internationalization of Blank______ ownership.
corporate
As an investor puts more international stocks in his or her portfolio, the risk of the portfolio Blank______.
declines
The cost of recording, transmitting and processing information Blank______ from the 1960s to the 1990s.
decreased
Technology has been a major factor in the growth of global capital markets because technology has Blank______.
decreased the costs of transactions
The Eurocurrency market experienced growth initially because it offered financial advantages to investors who wanted to Blank______.
deposit and borrow other currencies
Globally, there has been a trend toward Blank______ of the financial markets.
deregulation
Japanese banks are now allowed to open international banking facilities. This is made possible by Blank______.
deregulation
The Big Bang that occurred in Great Britain was the name given to the start of Blank______ in that country.
deregulation
The global equity markets are facilitated by Blank______ and the advances in communication and information technology.
deregulation
The growth of the international capital market has been facilitated with the Blank______ of financial services.
deregulation
The removal of capital controls were in place until the global financial crisis of 2008-2009. As the crisis unfolded, some wondered if Blank______ was partly to blame.
deregulation
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 Blank______.
deregulation
An investment bank is a type of ____ (direct or indirect?) performer in a capital market.
direct
Because non-US firms do not have to comply with SEC regulations, the limited Blank______ requirements make the Eurobond market more attractive than issuing dollar-denominated bonds in the US.
disclosure
US firms that issue securities in the US have to comply with SEC regulations. If these firms issue securities in the Eurobond market, an advantage is limited Blank______ requirements, as they do not have to provide as much information.
disclosure
Investors are investing in foreign equity markets to Blank______ their portfolios.
diversify
Marta's company sells stock to investors. What type of capital market loan is this?
equity
The instruments used in capital markets are either Blank______ loans, in which a corporation sells stock to investors, or Blank______ loans in which a firm borrows money.
equity; debt
A bond that is issued by a German corporation, denominated in US dollars, and sold to investors outside the US by an international syndicate of banks is an example of a(n) Blank______.
eurobond
Which service has been shown to be the most tightly regulated in many countries all around the world?
financial
What is the most common type of bond in the global bond market?
fixed-rate bond
What type of bond pays the investor an annual interest payment and then the face value is added back at maturity?
fixed-rate bond
A bond sold outside a borrower's country and denominated in the issuing country's currency is called a(n) Blank______ bond.
foreign
Within the Eurocurrency market, banks are allowed much more freedom from regulation when considering Blank______ currencies.
foreign
The predominant factor that complicates the ability of an investor to reduce total risk by diversifying their portfolio in the global capital market is Blank______.
foreign exchange risk
The broadest range of investment opportunities would be found in a Blank______ capital market.
global
Private investment funds that make "long bets" on assets they think will increase in value or "short bets" on assets they think will decline in value are called Blank______ funds.
hedge
Interest rates for borrowing money in domestic markets are Blank______ global markets because the pool of investors in domestic markets is smaller than in global markets.
higher than
Since 1984, foreign holders of Eurobonds are exempt from Blank______ tax withheld from interest payments, making it more feasible for U.S corporations to sell Eurobonds directly to borrowers.
income
Unpredictable movements in exchange rates are likely to Blank______ the risk associated with foreign currency borrowing.
increase
Martin Feldstein felt that the lack of "patient money" was due to the Blank______ about foreign investments, and that if investors knew more about foreign investments then the global capital markets would be more efficient.
lack of information
According to Bruno Solnik's classic study, a fully diversified portfolio that contains stocks from many countries is Blank______ as risky as a fully diversified portfolio that contains only US stocks.
less than half
Because of the limited regulation of the Eurobond market, there is a ____ (lower or higher?) cost of issuing these bonds.
lower
When a company is starting up, it likely needs to borrow startup funds. A key advantage of borrowing from global capital markets is that it Blank______.
lowers the borrower's cost of capital
To help curb the global financial crisis of 2008-2009, Blank______ regulations were put in place for certain sectors of the financial services industry.
more
Government regulation tends to Blank______ the cost of capital in most domestic capital markets.
raise
The most significant consequence for investors using the global capital market versus the domestic market is that investors can diversify their portfolios internationally, which allows them to Blank______.
reduce their risk
Banks must keep some liquid funds to satisfy demand and must also set aside a percentage of each dollar deposited as a Blank______ requirement.
reserve
When a British bank accepts a deposit in pounds sterling, it must set aside a fraction of that money to be kept in an account at the Bank of England. All industrialized countries operate with this type of Blank______ requirement.
reserve
Forward exchange markets are more likely to lower risk with Blank______ borrowings.
short-term
The level of nondiversifiable risk in an economy is known as Blank______ risk.
systematic
Interest rates in domestic markets are higher than interest rates in global markets because Blank______.
the pool of investors in domestic markets is less than global markets
