Test Bank Ch.18 International Capital Markets

PART VI International Portfolio Investment and Asset Pricing

Chapter 18 International Capital Markets

Notes to instructors:

Answers to non-numeric multiple choice questions are arranged alphabetically, so that answers are randomly assigned to the five outcomes.

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1. Bonds that are issued by a domestic resident, traded in the domestic market, and denominated in the domestic currency are called domestic bonds.

2. Capital markets are markets for long-term assets, with maturities greater than one year.

3. The two kinds of international bonds are dollar bonds and foreign bonds.

The two kinds of international bonds are foreign bonds and Eurobonds.

4. Foreign bonds are issued in a domestic market by a foreign borrower.

5. Eurobonds are denominated in one or more currencies but are traded in external markets outside the borders of the countries issuing those currencies.

6. The most prominent bonds selling in national bond markets are foreign bonds.

Domestic bonds are usually the most prominent bonds.

7. The General Agreement on Tariffs and Trade (GATT) has standardized bond price and yield quotation conventions and registration and disclosure requirements.

These differ by country.

8. Most bonds are quoted as price-plus-accrued-interest.

9. The World Bank is restricted from issuing Eurobonds.

The World Bank has issued Eurobonds in a variety of currencies and maturities.

10. A global bond is an international bond that trades in both the external Eurobond market as well as in one or more internal bond markets.

11. A global bond is a bond issued by a foreign borrower.

That’s a foreign bond.

12. H-shares are shares of Chinese companies traded on the Hong Kong Stock Exchange.

13. State shares in China are held by the government or a government-owned institution.

14. B-shares are traded on Chinese stock exchanges, but are available only to foreign investors and some selected domestic securities firms.

15. The value of the U.S. stock market comprises more than half of world stock market capitalization.

Exhibit 18.5 shows that the U.S. equity market comprises about 40 percent of world equity value.

16. The amount of money in an open-end mutual fund changes as investors buy or sell the fund.

17. The amount of funds under management in a closed-end mutual fund is fixed.

18. Investment funds are only sold in the United States.

Investment funds (e.g., mutual funds in the U.S.) are traded in many national markets, and are gaining in popularity around the world.

19. Closed-end country funds are funds whose shares are traded in a single country.

Closed-end country funds invest in the assets of a single country.

20. Closed-end country funds cannot invest in countries with capital flow restrictions and hence are not useful in gaining access to restricted capital markets.

Many foreign governments allow restricted access to their capital markets through closed-end country funds.

21. Purchasing power parity ensures that the prices of closed-end country funds do not diverge substantially from their net asset values.

Because fund shares sell in the domestic market and the underlying assets sell in the foreign market, CECFs can diverge from their underlying net asset values.

22. ETF stands for externally traded fund.

An ETF (exchanged-traded fund) is a closed-end fund that trades as shares on an exchange.

23. A hedge fund is a mutual fund that is used by small investors to hedge the currency risks of their globally diversified portfolios.

Hedge funds are private investment partnerships with strict capital requirements.

24. As publicly traded securities, hedge funds are closely regulated in the United States by the Securities and Exchange Commission.

As private investment partnerships, hedge funds are exempt from SEC regulation.

25. The major function of the prospectus of a mutual fund is to describe how the fund has performed in the recent past.

Funds describe their investment objectives and strategies in the prospectus.

26. Asset allocation refers to the allocation of dividends to various investor clienteles.

Asset allocation refers to the target weights given to various asset classes.

27. Evidence on the success of market timing strategies is mixed.

28. Since the standardization of international accounting standards through the International Accounting Standards Committee, corporations need prepare only a single set of financial statements to satisfy their various constituencies.

Most investors still prefer financial statements cast in their own image.

Multiple Choice Select the BEST ANSWER

1. Which of the following is a categorization of bond markets?

a. domestic versus international

b. domestic versus internal

c. foreign versus government

d. foreign versus international

e. foreign versus non-resident

2. A General Motors Acceptance Corporation (GMAC) bond trades on the New York Stock Exchange. In which type of market is it traded?

a. a domestic market

b. a foreign market

c. a Eurobond market

d. an external market

e. all of the above

3. A bond issued by Air Express of the United Kingdom trades over-the-counter in the United States. In which type of market is it traded?

a. a domestic bond market

b. an exchange-traded bond market

c. a Eurobond market

d. a foreign bond market

e. a private bond market

4. Which of statements (a) through (d) about foreign bonds is ?

a. Foreign bonds are denominated in the currency of the issuing company.

b. Foreign bonds are issued in a local market by a foreign borrower.

c. Foreign bonds are marketed to local residents.

d. Foreign bonds are regulated by local authorities.

e. All of the above are

5. Government bonds are conventionally quoted as an effective annual yield in ____.

a. continental Europe

b. Japan

c. the United States

d. more than one of the above

e. none of the above

6. Outside of mainland China, the largest number of Chinese stocks are traded in ____.

a. Hong Kong

b. New York

c. Seoul

d Singapore

e. Tokyo

7. The largest stock exchange on China’s mainland is located in ____.

a. Beijing

b. Guanzhou

c. Shanghai

d. Shenzhen

e. Xi’an

8. Trade migrates toward _____.

a. domestic markets

b. international markets

c. liquidity

d. the earth’s magnetic poles

e. volatility

9. Closed-end country funds can sell at prices that differ from their net asset value because of ____.

a. cross-market arbitrage

b. heterogeneous investor expectations

c. portfolio maximization in the presence of investment restrictions

d. all three of the above

e. two of the above

10. Which of the following is an impediment to purchasing foreign shares directly in a foreign market?

a. cross-border differences in accounting conventions and tax laws

b. difficulty in obtaining or interpreting information, or both

c. higher transaction costs including commissions

d. the inconvenience of receiving dividends in a foreign currency

e. Each of the above is an impediment.

11. Portfolios can be diversified internationally through each of the following EXCEPT ____.

a. direct purchase of foreign securities

b. exchange-traded funds

c. investment in the shares of multinational corporations

d. investment in domestic government bonds

e. professionally managed mutual funds

12. Shares of a foreign corporation issued directly to domestic investors but denominated in the foreign currency of the issuing company are called ____.

a. cranks

b. euro dollars

c. euro shares

d. foreign shares

e. open-end funds

13. Which of (a) through (d) is not a vehicle for investing in foreign stock markets?

a. Eurodollar contracts

b. index futures contracts

c. index option contracts

d. stock index swap contracts

e. All of the above can be used for investing in foreign stock markets.

14. Chinese shares that are traded on the New York Stock Exchange are called ____.

a. A-shares

b. B-shares

c. H-shares

d. N-shares

e. Y-shares

15. A closed-end fund that trades as shares on an exchange is called _____.

a. Euroshare

b. exchange-traded fund

c. private equity

d. restricted fund

e. venture capital

16. Index funds often specialize in a particular ____.

a. company

b. country

c. industry

d. more than one of the above

e. none of the above (index funds track the market portfolio)

17. Actively managed investment funds follow which of these investment strategies?

a. asset allocation

b. buy and hold

c. security selection

d. all three of the above

e. two of the above

18. How can multinational corporations respond to a demand on the part of foreign shareholders for financial accounting information?

a. Do nothing.

b. Prepare convenience translations of financial statements.

c. Prepare supplementary financial statements based on International Accounting Standards.

d. Prepare supplementary financial statements based on U.S. accounting standards.

e. Each of the above is a possible response.