Chapter 2 - The Domestic And International Financila Marketplace

Question 1

What is the main purpose of economy financial system

Answer 1

To facilitate the transfer of functions for surplus spending units to deficits spending units

Question 2

_________ such as investment bankers bring together the surplus and deficit units in the capital market so that the funds can be transferred.

Answer 2

Financial middle man

Question 3

______ such as commercial banks, receive primary claims from their borrowers and issue secondary claims to their lenders

Answer 3

Financial intermediaries

Question 4

________ claims have different risk and liquidity characteristics than primary claims

Answer 4

Secondary

Question 5

Financial assets consist of

Answer 5

• money
• debt securities
• equity securities

Question 6

______ are the vehicles through which financial assets are bought and sold

Answer 6

Financial markets

Question 7

Financial markets include:

Answer 7

Money or capital markets and primary or secondary markets

Question 8

Money markets deal in

Answer 8

Security with maturities of approximately one year or less

Question 9

Capital markets deals in securities

Answer 9

With maturities greater than one year.

Question 10

Primary markets are those in which

Answer 10

New securities are issued

Question 11

Secondary markets are those in which

Answer 11

Existing security are traded

Question 12

Capital markets Are considered to be efficient , if

Answer 12

Security prices instantaneously and fully reflect in an unbiased way , all economically relevant information about securities prospective returns and the risk of those returns

Question 13

Eurocurrency

Answer 13

Is currency deposited in a bank located outside the country of origin

Question 14

The Eurocurrency is an important alternative to

Answer 14

Domestic sources for financing for multinational firms

Question 15

The interest rate charge for Eurocurrency loans is

Answer 15

Tied to LIBOR, the London interbank offered rate

Question 16

Exchange rate

Answer 16

Is the rate at which one currency can be converted to another

Question 17

Spot rate

Answer 17

Is the rate of exchange for currency being bought and sold for immediate delivery today

Question 18

Forward rate

Answer 18

Is the rate of exchange between currency to be delivered at a future point and time usually 30 , 90 , 180 days from today

Question 19

The future rate is also

Answer 19

A rate of exchange between currency to be delivered at a future point in time

Question 20

In contrast to forward contracts , future contracts are

Answer 20

Standardized with respect to size and deliver, date, and are traded on organized exchanges such as the International Monetary Market

Question 21

Foreign currency options give the option holder

Answer 21

The right to buy or sell a foreign currency at a fixed price over the same time horizon

Question 22

Investment returns are normally measured using

Answer 22

The holding period return concept

Question 23

Important equation

Answer 23

Annualized forward premium or discount = (F- S^0 / S^0) (12/n) (100%)
N = # months in the forward contract
S^0 is the spot rate
F for forward rate

Question 24

Important equation2

Answer 24

Holding period return (%) = Ending price - Beginning price + Distributions received / beginning price x (100%)

Question 25

In the us financial system funds flow from

Answer 25

Net savers (such as house holds ) to net investors (such as businesses) through financial middleman and financial intermediaries

Question 26

Financial middleman include

Answer 26

Security bankers, and investment bankers

Question 27

Financial intermediaries includes

Answer 27

Commercial banks , thrift institution, investment companies, and finance companies

Question 28

Financial markets are defined as

Answer 28

Money or capital markets and primary or secondary markets

Question 29

Companies engage international financial transactions face problems like

Answer 29

Political and exchange rate risk and addition to those risk encountered in domestic transactions

Question 30

The London interbank Offer rate

Answer 30

Is the bank interest rate against which Eurocurrency loans are priced

Question 31

Holding period return measures the

Answer 31

Actual or expected returns from holding a security including price changes and distributions such as dividends or interest

Question 32

Term loans

Answer 32

Have initial maturities between one and 10 years and are repaid in installments over the life the loan

Question 33

Listed security exchanges

Answer 33

Operate at designed places of business and have requirements governing the type of securities they can list and trade

Question 34

OTC security markets

Answer 34

do not have centralized places of business but rather exist of networks security dealers connected by a community system from telephone and computer terminals that allow dealers to post the prices at which they are willing to buy and sell various securities

Question 35

Bid price

Answer 35

Is the price at which the dealer is willing to buy a given security

Question 36

Ask price

Answer 36

Is the price the dealer is willing to sell a given security

Question 37

Spread

Answer 37

For any given dealer the ask price is going to be greater than the bid price. This difference is the spread. Through which the dealer makes a profit

Question 38

Proxy statement

Answer 38

Also called a filing . Firms are required to file proxy statements prior to annual shareholder meetings, detailing among others matters to be discuss and voted on

Question 39

Multinational corporation

Answer 39

Has direct investment in manufacturing and/or distribution facilities in more than one country.

Question 40

Eurodollar

Answer 40

These dollars are deposited in a bank outside the US they become Eurodollar

Question 41

Direct quote

Answer 41

Is the home currency price of one unit of foreign currency

Question 42

Indirect quote

Answer 42

Is the foreign currency price of one unit of the home currency

Question 43

Spot rates

Answer 43

Represents the rate of exchange for being bought and sold for immediate delivery

Question 44

Forward contract

Answer 44

Is contract between 2 individuals who are known to each other such as a importer and commercial bank

Question 45

Future contract

Answer 45

Exchange traded agreement that calls for the delivery of a standardized amount of an item at a standardized maturity date

Question 46

Option

Answer 46

are contracts that give the option buyer the right, but not the obligation, to either buy or sell a fixed amount of foreign currency at a fixed price at a time up to, or at, the expiration date of the option

Question 47

Call option

Answer 47

Is an option to buy something such as foreign currency

Question 48

Put option

Answer 48

Option to sell foreign currency.

Question 49

Efficiency capital market

Answer 49

Stock prices provided an unbiased estimate of the true or intrinsic, value of an enterprise

Question 50

Short selling

Answer 50

You sell a stock that you do not own by “borrowing” from another investor then replacing it later by purchasing it presumably at a lower price.

Question 51

Outlays

Answer 51

The cost incurred to undertake an investment project

Question 52

Tax deduction

Answer 52

An amount subtracted from taxable income . For a corporation with a 35% marginal tax rate, a $100 tax deduction taxable income by $100 and reduces taxes owed by $35

Question 53

Marginal tax rate

Answer 53

Tax rate on the next dollar of taxable income earned by an individual person or firm

Question 54

Capital gains

Answer 54

Income received by corporations is currently taxed at the same marginal tax rate as ordinary income

Question 55

Capital losses

Answer 55

Are deductible only against capital gains

Question 56

S corporation

Answer 56

A small business that takes advantage of corporate form of organization while having its income taxed directly to the stockholders at their individual personal income tax rates.