Financial Management
A financial product in which banks bundle international stocks so they can be sold on US exchanges in US dollars is termed a __________.
(ADR) American Depository Recepits
Suppose you bought a stock for $19.84 one year ago. Today the stock is currently priced at $18.45. The stock recently paid a $3.50 dividend, what is the percentage return for this stock?
.1064 (18.45-19.84+3.50)/19.84 = 0.1064 or 10.64%
Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the percentage return for this stock?
.1801 (22.08-22.10 + 4)/22.10 = 0.1801 or 18.01%
The ask price of stock A is $56.75 while the bid price for stock A is $56.71. What is the bid ask spread?
0.04 56.75-56.71
Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the percentage return for this stock?
0.05 (47.42-45)/45 = 0.0538 or 5.38%
Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the percentage return for this stock?
0.0799 (109.54-101.44)/101.44 = 0.0799 or 7.99%
The ask price of stock A is $215.54 while the bid price for stock A is $215.14. What is the bid ask spread?
0.40 215.54-215.14
Suppose you bought a stock for $45 one year ago. Today the stock is currently priced at $47.42. If the stock does not pay a dividend, what is the dollar return for this stock?
2.42 47.42-45
Suppose you bought a stock for $22.10 one year ago. Today the stock is currently priced at $22.08. The stock recently paid a $4 dividend, what is the dollar return for this stock?
3.98 22.08-22.10 + 4 = 3.98
Suppose you bought a stock for $101.44 one year ago. Today the stock is currently priced at $109.54. If the stock does not pay a dividend, what is the dollar return for this stock?
8.10 109.54-101.44 = 8.10
Fixed "Pegged"
A country's monetary authority intervenes to maintain a constant value of the country's currency
What is an example of firm capital?
Cash
What are the two ways a syndicate can place a bond?
Competitive sale or negotiated sale
What are the three important areas of finance?
Corporate Finance, Investments, and Banking/financial institutions
What type of derivative security discussed in this section allows companies to lock in an FX rate for the future?
Currency Forward and Currency Future
When dealers have to compete with one another, transaction costs will generally ___________.
Decrease
If a currency (Swiss Franc) appreciates relative to a second currency (Chinese Yuan), then the exchange rate measured as SF/Yuan goes:
Down
What are the types of global bonds?
Eurobond - US Bulldog bond - UK Yankee bond - Non us Samurai bond - Japan
What is a common abbreviation for foreign exchange risk?
FX Risk
An IPO is a seasoned equity offering.
False
Corporate tax rates are the same in every country because of international trade agreements.
False
Dealer markets have a physical location.
False
Economics is a subfield of Finance
False
Efficient markets will often have mispriced securities.
False
Privately-held companies and publicly traded companies will always maximize shareholder value in the same way.
False
When Chile pegged the Chilean Peso to the US dollar in the 1970s it was a great help to their national economy.
False
While competitive sales allow underwriters to submit bids to purchase bonds, negotiated sales do not.
False
The NYSE specialist will charge a higher price to sellers of the stock and a lower price to the buyer of the stock.
False Charge a Lower price to sellers of the stock and a higher price to the buyer
Inefficient markets are those in which prices will respond quickly to new information.
False Respond Slowly
A stock is a debt instrument issued by corporations.
False Stock represents ownership in a company
Country risk and political risk are the same thing?
False Think of the example of Venezuela. Before Hugo Chavez, the country had a vibrant economy due to its oil. After Hugo Chavez, the country still had the same natural resources, but his political stance has made the country economically weak.
Firms that are maximizing shareholder value will generally see stability in the firm's stock price.
False see increases in the firm's stock price.
A limit order to buy a stock at $101.55 would execute at the current ask price.
False The order would execute when the ask price is at or below $101.55.
Firms with low unexpected earnings usually exhibit large positive returns on the earnings announcement day.
False they usually exhibit large negative returns
Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors.
False Banks make money when interest rates they charge to borrowers are MORE than interest rates they pay depositors.
The only way to raise foreign capital is through the debt markets?
False Firms can seek equity investment as well.
Corporate finance is devoted to understanding various types of financial instruments.
False Investments is
A Treasury bond is a debt instrument issued by corporations.
False It is issued by governments
Nasdaq is an example of an auction market.
False NASDAQ is a dealers market
NASDAQ is the world's largest secondary financial market.
False NYSE is the largest secondary market
A market order to sell a stock would execute at the current ask price.
False The order would execute at the current bid price.
Stocks that are listed on dealer markets generally have a single dealer for each stock.
False They generally have multiple dealers
Efficient markets are those in which prices are volatile.
False Efficient markets are those in which prices reflect all relevant information.
Which are two primary methods used the mitigate FX risk?
Financial derivatives Direct investment
Which of the following is not an example of firm capital?
Financial markets
If a country intervenes to maintain a constant value of the country's currency, it is a ___________ exchange rate regime.
Fixed/Pegged
What are the types of exchange rate regime discussed in this section?
Floating, fixed and manged floating
The general process of eliminating risk with FX is referred to as:
Hedging
What are ways firms can maximize shareholder value?
Hire new employees to improve production and the profitability . Invest in new research and development that will be profitable. Invest capital into projects that will improve the profitability of the firm.
If a product is made 100% domestically, what can affect its domestic market?
International competition
What is a way firms can maximize shareholder value?
Invest in new machinery that will be profitable.
What does it mean if the US dollar/Canadian dollar exchange rate is 1.1?
It takes 1.1 US dollars to buy 1 Canadian dollar
Which countries has experienced significant country risk over recent years?
Italy Puerto Rico Greece
Outsourcing involves the ______ market.
Labor
In finance jargon, what is another word that means to buy an asset?
Long to sell is Short
The policy that allows a currency to float within a minimum and a maximum is called:
Managed Floating
What are the two types of orders that are used by investors?
Market Orders and Limit Orders
The goal of the firm is to ___________ shareholder value.
Maximize
Two examples of US legislation to promote global free trade are: [
NAFTA TPP
Managed Floating
Not controlled entirely by market demand and supply, but is partially controlled by government intervention that limits minimum and maximum value
A stock is a share of ______________ in a particular company.
Ownership
What best explains the role of prices?
Prices convey information Prices affect the distribution of income Prices affect incentives
The goal of the firm is to maximize ___________ value.
Shareholder
Return on Dollars
Sold price - bought price + CF (bond coupons, dividends for stocks) Pt-Pt-1+CFt
Government funds designed to invest abroad are termed:
Sovereign wealth funds
Which are the potential costs of doing international business.
Taxes Tariffs Currency Restrictions
Market orders are __________ sensitive while limit orders are _____________ sensitive.
Time and Price
A bond is a debt instrument issued by corporations or governments.
True
A bond is similar to a loan.
True
A limit order to buy a stock at $101.55 would execute when the ask price is at or below $101.55.
True
A market order to buy a stock would execute at the current ask price.
True
An IPO occurs on the primary market.
True
Auction markets have a physical location.
True
Capital is defined as a financial asset.
True
Companies can raise capital by issuing bonds or stocks.
True
Companies should always maximize shareholder value.
True
Corporate finance focuses on the decision making by the management of the firm.
True
Firms that are maximizing shareholder value will generally see increases in the firm's stock price.
True
Firms with high unexpected earnings usually exhibit large positive returns on the earnings announcement day.
True
In an efficient market, new information will move prices almost immediately.
True
In an inefficient market, prices will slowly respond to new information.
True
Inefficient markets will often have mispriced securities.
True
Markets are where prices are determined.
True
Primary financial markets are markets where issuers place new securities with investors.
True
Stock represents ownership in a particular company.
True
Stocks and bonds are two types of financial instruments.
True
Syndicates are generally made up of investment banks and other institutional investors.
True
The NYSE specialist has an objective to provide liquidity to the market.
True
The bid-ask spread is compensation to the specialist for providing liquidity to the market.
True
The goal of the firm is to maximize shareholder value.
True
The idea of comparative economic advantage provides support for the benefits of global free trade?
True
If a US bond that is denominated in US dollars is issued in Europe, it is an example of a Eurobond?
True In general, a Eurobond is any international bond that is denominated in a currency other than the local currency.
Floating "Free Floating"
Value of the currency is determined by supply and demand
Percentage Returns
dollar returns / price of security at at time or previous period
If Ford manufactures a vehicle in the US paying dollars and sells it in Mexico collecting pesos, if the price in Mexico for the vehicle stays constant, but the value of the Peso depreciates against the dollar, then Ford will make ____________ profit measured in US dollars.
less
The goal of using a financial derivate such as a forward or future is to?
make no profits through exchange rate movements
Why would a country have incentives to devalue its currency? A weaker currency ______________.
makes exports relatively cheaper for foreign consumers. makes imports relatively more expensive for domestic consumers. in general a weaker currency can help a domestic economy.
If a country follows a floating exchange rate policy then the value of the currency is determined strictly by:
supply and demand in the open market
The purpose of currency restrictions is:
to limit the ability of a foreign firm to take capital out of a country
What is the primary motive for tariffs?
to protect the domestic industry