Hill Ch.8 Full Test Bank Foreign Direct Investment

Student name:__________

1) What is a capital market? Define market makers.

2) Explain how equity loans and debt loans differ in terms of attractiveness to businesses.

3) Explain the changes observed in the risk of investments when an investor increases the number of stocks in his or her portfolio.

4) There is a low correlation between the movement of stock markets in two different countries. What are the two factors that influence this?

5) Discuss the impact of technology on the growth of the global capital market.

6) Briefly describe the trends observed in the global deregulation of financial services.

7) What are the financial advantages that make the Eurocurrency market attractive to both depositors and borrowers?

8) What are the drawbacks of the Eurocurrency market?

9) Describe a fixed-rate bond.

10) What are foreign bonds?

11) Explain Eurobonds with an example.

12) Write a brief note on foreign exchange risks and the cost of capital.

13) How can a borrower hedge against unpredictable movements in exchange rates?

14) How does growth in global capital markets impact investing firms?

15) Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include

A) governments.
B) corporations with surplus cash.
C) pension funds.
D) insurance companies.

16) _____ perform a direct connection function in capital markets.

A) Insurance brokers
B) Investment banks
C) Pension fund managers
D) Commercial banks

17) _____ requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making.

A) An equity loan
B) A stock loan
C) A debt loan
D) A bonded loan

18) The liquidity of the market is _____ in a purely domestic capital market.

A) held in reserves
B) unlimited
C) based upon the stock market
D) limited

19) The cost of capital is

A) higher in a purely domestic capital market than in a global market.
B) lower in a domestic capital market than in an international market.
C) higher in a global market than in a purely domestic capital market.
D) the same in either a global market or a purely domestic capital market.

20) The risk associated with a portfolio

A) declines exponentially as the number of stocks purchased increases and continues to decline until a point of zero risk is reached.
B) decreases as the investor increases the number of stocks in her portfolio.
C) grows exponentially with the number of stocks purchased.
D) increases as the investor increases the number of stocks in her portfolio.

21) The systematic risk of the stock market is the

A) movement in a stock portfolio’s value that is attributable to the individual selections made for that portfolio.
B) level of diversifiable risk in an economy.
C) movement of the economy of a country.
D) level of nondiversifiable risk in an economy.

22) A _____ brings together those who want to invest money and those who want to borrow money.

A) consumer market
B) value chain
C) supply chain
D) capital market

23) Market makers are

A) financial service companies that connect investors and borrowers.
B) nonbank financial institutions who want to invest money.
C) high net worth individuals with surplus cash to reinvest.
D) those who want to borrow money including individuals, companies, and governments.

24) Which of the following statements is true of market makers?

A) Commercial banks are not allowed to function as market makers.
B) Market makers are large investors who drive an economy.
C) Market makers facilitate only equity-based loans.
D) Market makers connect investors and borrowers in a capital market.

25) An equity loan is made when

A) a corporation pledge equities or other assets to borrow money.
B) corporations avail cash loans from individuals.
C) a corporation sells stock to investors.
D) corporations issue bonds to individual investors.

26) Which of the following statements is true of debt loans?

A) Management has the discretion in paying the amount to investors.
B) Debt loans should be repaid at regular intervals.
C) Returns from debt loans are variable in nature.
D) Corporations need not pay back the debt loans if they incur losses.

27) When an investor purchases a corporate bond, he purchases the right to receive a

A) share of the overall revenues that the company generates.
B) part of the title for the assets that the corporate holds.
C) specified fixed stream of income from the corporation.
D) share of the profits that the company generates through operations.

28) An important drawback of a purely domestic capital market is that the

A) investment does not receive protection from governments.
B) investments are riskier than in global capital markets.
C) market lacks a strong regulatory mechanism.
D) cost of capital tends to be higher than it is in a global market.

29) A purely domestic capital market faces the problem of

A) foreign exchange risk.
B) limited liquidity.
C) lack of regulation.
D) deregulated markets.

30) The cost of capital is the

A) interest received on investments made by the company.
B) price of borrowing money.
C) difference between cost of inputs and outputs.
D) total value of raw materials that a company uses.

31) As investors increase the number of stocks in their portfolio, the portfolio’s risk

A) increases initially and declines later.
B) declines slowly and steadily.
C) increases exponentially.
D) declines rapidly in the beginning.

32) Systematic risk refers to movements in a stock portfolio’s value that are

A) attributable to macroeconomic forces affecting an economy.
B) specific to the firm or individuals who invest in a portfolio.
C) attributable to factors pertaining to an individual firm.
D) specific to the company that facilitates the investment portfolio.

33) The relatively low correlation between the movement of stock markets in different countries indicates that

A) diversifying a portfolio will increase the risk of investing.
B) most countries face similar economic conditions.
C) countries pursue different macroeconomic policies.
D) most stock markets are highly segmented from each other.

34) The element of risk into investing in foreign assets is greater with _____ exchange rates.

A) floating
B) pegged
C) fixed
D) managed

35) ________ is made when a corporation sells stock to investors.

A) A corporate bond sale
B) A debt loan
C) A Eurobond investment
D) An equity loan

36) In _____, the limited pool of investors implies that borrowers must pay more to persuade investors to lend them their money.

A) a purely domestic market
B) a mixed market
C) an international market
D) a purely Euro market

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

A) volatile exchange rates associated with the current floating exchange risk regime.
B) the different kinds of tax regimes in different countries.
C) the inaccessibility of foreign stock exchanges to most investors.
D) the poor quality of many stocks in international start-up firms.

38) A _____ market benefits investors by providing a wider range of investment opportunities, thereby allowing them to build portfolios of international investments that diversify their risks.

A) foreign exchange
B) global capital
C) domestic exchange
D) domestic capital

39) Which of the following statements is true of the use of information technology in financial services?

A) Information technology prevents the spread of financial crises.
B) Financial services are an information-intensive industry.
C) Financial services do not use decision-making systems.
D) It does not require the processing of large volumes of information.

40) What is a disadvantage of the integration of the international capital market facilitated by technology?

A) Segregated international capital markets will emerge as a result of technology.
B) Complexity in processing large volumes of data will increase.
C) Shocks that occur in one financial center will spread globally.
D) Systems integration hinders real-time data transfer across different countries.

41) Hedge funds position themselves to make ________ bets on assets that they think will ________.

A) long; weather a volatile market
B) long; increase in value
C) short; weather a volatile market
D) short; increase in value

42) Which of the following statements is true of the deregulation of the financial industry?

A) Countries can strengthen the global capital market by encouraging strict regulations.
B) Financial services have historically been the most deregulated of all industries.
C) Deregulation helped the development of an international capital market.
D) Deregulation compels financial services companies to remain as domestic companies.

43) Hedge funds

A) are public investment funds that invest in corporate bonds and shares.
B) make long bets rather than short bets.
C) are investment funds managed by the government.
D) make short bets on assets that they think will decline in value.

44) Some analysts, who believe that globalization of capital has serious risks, argue that

A) capital does not shift in and out of countries as quickly as conditions change.
B) individual nations are becoming more vulnerable to speculative capital flows.
C) deregulation of trade is helpful for the economic growth in a country.
D) most of the capital that moves internationally is pursuing long-term gains.

45) What is a disadvantage of the global capital market?

A) Foreign investments may be driven by speculative flows in the market.
B) A truly global market reduces the liquidity of investments.
C) The availability of capital is low in a global capital market.
D) The cost of capital is more in a global market than a domestic market.

46) According to some analysts, deregulation and reduced controls on cross-border capital flows are

A) having a stabilizing effect on national economies.
B) making individual nations more vulnerable to speculative capital flows.
C) making investors nervous and causing them to pull their money out of foreign nations.
D) allowing undeveloped nations to enter the global market.

47) Harvard economist Martin Feldstein argues that the lack of patient money is due to

A) the flood of information, due to the Internet, that investors receive about current events in other countries.
B) money owners and managers preferring to keep their money “home.”
C) the relative scarcity of information that investors have about foreign investments.
D) money owners and managers preferring to place their money in foreign investments.

48) A Eurocurrency is

A) the currency used by the countries of the European Union.
B) the currency formerly used in many European countries before the formation of the European Union and the institution of the euro.
C) any currency banked outside of its country of origin.
D) any currency banked within a European country.

49) The Eurocurrency market is attractive to both depositors and borrowers because

A) it allows fair trade within the European Union.
B) it has strong government regulations and safeguards.
C) of its commitment to economic growth in underdeveloped nations.
D) of its lack of government regulation.

50) _____ is characterized by a lack of government regulation.

A) The Eurocurrency market
B) A money market fund
C) The New Your Stock Exchange
D) A hedge fund

51) _____ deposits are regulated in all industrialized countries.

A) U.S. currency
B) Domestic currency
C) Foreign currency
D) Eurocurrency

52) Companies receive _____ when using the Eurocurrency market.

A) a lower interest rate on deposits and pay more for loans
B) tax incentives
C) a higher interest rate on deposits and pay less for loans
D) liquid asset reserve waiver

53) Investors who purchase a fixed-rate bond receive

A) incremental payouts until the bonded money runs out.
B) cash payoffs only at maturity.
C) a full cash payoff on demand.
D) a fixed set of cash payoffs.

54) Foreign bonds sold in the United States are

A) Yankee bonds.
B) Uncle Sam’s bonds.
C) Bulldogs.
D) Eagles.

55) _____ are normally underwritten by an international syndicate of banks.

A) Samurai bonds
B) Eurobonds
C) Yankee bonds
D) Foreign bonds

56) Eurodollars are

A) the exchange value of the dollar with the euro.
B) used to pay for imports from Europe.
C) dollars banked outside of the United States.
D) the exchange buffer that the euro has against dollar.

57) Which of the following statements is true of Eurocurrency?

A) The Eurocurrency market is a relatively high-cost source of funds.
B) It is produced and banked within European countries.
C) Eurocurrency can be created anywhere in the world.
D) It is used only for internal transactions within European Union.

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

A) is separated from the foreign exchange market.
B) lacks government regulation.
C) is associated with low risk.
D) gives high levels of investor protection.

59) Banks offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency because Eurocurrency deposits

A) are funded by the European union.
B) lack government regulations.
C) are associated with low risk.
D) have minimum foreign exchange risk.

60) What is an advantage that banks have when they deal with foreign currencies?

A) Interest payments to customers are low when dealing with foreign currencies.
B) Accounts need not be maintained when dealing with foreign currencies.
C) Risks that investors face are low when dealing with foreign currencies.
D) Governments give banks more freedom when dealing with foreign currencies.

61) When using the Euromarkets, companies

A) have funds that lack liquidity.
B) pay less for loans.
C) attract low interest rates.
D) are secured from foreign exchange risks.

62) One drawback of the Eurocurrency market is

A) increased governmental controls.
B) high reserve ratio requirements.
C) low interest rates on deposits.
D) exposure to foreign exchange risk.

63) Which of the following is true of fixed-rate bonds?

A) Returns from fixed-rate bonds are dependent on the profitability of the issuing company.
B) Investors get back the face value of the bond at maturity of fixed-rate bonds.
C) Fixed-rate bonds issue cash payoffs only at maturity of fixed-rate bonds.
D) Investors get a share of the company’s profit when using fixed-rate bonds.

64) _____ are sold outside of the borrower’s country and are denominated in the currency of the country in which they are issued.

A) Micro bonds
B) Eurobonds
C) Foreign bonds
D) Regulatory bonds

65) The United States sells bonds that are denominated in dollars in Europe.This isan example of a

A) foreign bond.
B) Eurobond.
C) micro bond.
D) regulatory bond.

66) _____ are international bonds, normally underwritten by an international syndicate of banks and placed in countries other than the one in whose currency the bond is denominated.

A) Micro bonds
B) Foreign bonds
C) Eurobonds
D) Regulatory bonds

67) Eurobonds are

A) denominated in the currency of the country in which they are issued.
B) normally underwritten by an international syndicate of banks.
C) denominated in a currency that is accepted by the European Union.
D) sold outside the borrower’s county with reference to the originating currency.

68) An Italian corporation issues a bond denominated in dollars that has no regulatory interference. This is an example of a

A) foreign bond.
B) Eurobond.
C) micro bond.
D) regulatory bond.

69) What makes Eurobonds more attractive than most major domestic bonds?

A) presence of regulatory interference
B) strong disclosure requirements
C) favorable tax status
D) protection from exchange risks

70) Historically, _____ separated national equity markets from each other.

A) substantial regulatory barriers
B) fixed exchange rates
C) financial similarities
D) desire for high levels of profit

71) Approximately two-thirds of all Eurocurrencies are

A) Euro-yen.
B) Euro-pound.
C) Euro-euro.
D) Euro-dollars.

72) Which of the following is a drawback of the Eurocurrency market?

A) Borrowing funds within its home country can expose a company to foreign exchange risk.
B) There is a greater probability of a bank failure that would cause depositors to lose their money.
C) The system is overregulated and, therefore, more costly.
D) The higher interest rate received on home-country deposits reflects the costs of insuring against bank failure.

73) Which of the following is true of the Eurobond market?

A) There are many regulations that protect investors.
B) Government limitations are generally more stringent for securities denominated in foreign currencies.
C) There are less stringent disclosure requirements than in most domestic bond markets.
D) They have an unfavorable tax status.

74) _____ can inject risk into foreign currency borrowing.

A) Movements in exchange rates
B) Use of fixed-exchange rates
C) Issue of domestic bonds
D) Use of pegged exchange rates

75) Borrowers can hedge against foreign exchange risks by entering into a _____ contract.

A) hedge fund insurance
B) prevailing exchange rate
C) forward
D) global capital market

76) Entering into a forward contract will

A) increase the risk involved in a transaction.
B) lower the borrower’s cost of capital.
C) benefit the borrower because the interest rate will be lower.
D) raise the borrower’s cost of capital.

77) A capital market brings together those who want to invest money and those who want to borrow money.

⊚ true
⊚ false

78) Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors.

⊚ true
⊚ false

79) The cost of capital is the difference between cost of inputs and outputs.

⊚ true
⊚ false

80) By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market.

⊚ true
⊚ false

81) Investors can reduce the level of risk by diversifying a portfolio internationally.

⊚ true
⊚ false

82) The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions.

⊚ true
⊚ false

83) Using floating exchange rates will help countries reduce the risk of investing in foreign assets.

⊚ true
⊚ false

84) Financial services is an information-intensive industry.

⊚ true
⊚ false

85) The cost of recording, transmitting, and processing information has doubled with advancements in technology since 1964.

⊚ true
⊚ false

86) Financial services has historically been the most tightly regulated of all industries.

⊚ true
⊚ false

87) The Eurocurrency market has been one cause of a decrease in global financial regulations.

⊚ true
⊚ false

88) The globalization of capital has been universally seen as a positive development.

⊚ true
⊚ false

89) Economist Martin Feldstein has coined the term “hot money” to pertain to long-term capital flows.

⊚ true
⊚ false

90) The global capital market often lacks information about the fundamental quality of foreign investments.

⊚ true
⊚ false

91) If the international capital market continues to grow, financial intermediaries likely will provide less quality information about foreign investment opportunities.

⊚ true
⊚ false

92) Any currency can become a Eurocurrency.

⊚ true
⊚ false

93) Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency.

⊚ true
⊚ false

94) The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates.

⊚ true
⊚ false

95) Governments give banks less freedom when they deal in foreign currencies.

⊚ true
⊚ false

96) Depositors are not protected against bank failures in the Eurocurrency market.

⊚ true
⊚ false

97) Foreign bonds are sold within the borrower’s country and are denominated in the currency of the country in which they are issued.

⊚ true
⊚ false

98) Eurobonds are usually offered to residents of the country in whose currency they are denominated.

⊚ true
⊚ false

99) Government limitations are more severe for securities denominated in foreign currencies than for domestic securities.

⊚ true
⊚ false

100) Eurobonds fall within the regulatory domain of the European Economic Community.

⊚ true
⊚ false

101) Historically, regulatory barriers have made national equity markets work together.

⊚ true
⊚ false

102) A Chinese firm borrows 1 million U.S. dollars from an American bank. The cost of this loan will be less if the U.S. dollar appreciates against the Chinese currency.

⊚ true
⊚ false

103) The forward exchange market does not provide adequate coverage for long-term borrowings.

⊚ true
⊚ false