Hill12e Chapter 12 TB Answer Key PDF

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1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the priorInternational Business, 12e (Hill)Chapter 12 The Global Capital Market A capital market brings together those who want to invest money and those who want to borrow money. Answer: TRUE Expl...

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International Business, 12e (Hill) Chapter 12

The Global Capital Market

1) A capital market brings together those who want to invest money and those who want to borrow money. Answer: TRUE Explanation: Capital markets bring together those who want to invest money and those who want to borrow money. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 2) Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors. Answer: TRUE Explanation: A debt loan requires the corporation to repay a predetermined portion of the loan amount (the sum of the principal plus the specified interest) at regular intervals regardless of how much profit it is making. Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 3) The cost of capital is the difference between cost of inputs and outputs. Answer: FALSE Explanation: The cost of capital is the price of borrowing money, which is the rate of return that borrowers must pay investors. This is the interest rate on debt loans and the dividend yield and expected capital gains on equity loans. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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4) By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. Answer: TRUE Explanation: By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 5) Investors can reduce the level of risk by diversifying a portfolio internationally. Answer: TRUE Explanation: A portfolio's risk declines as the investor increases the number of stocks in the portfolio. By diversifying a portfolio internationally, an investor can reduce the level of risk even further because the movements of stock market prices across countries are not perfectly correlated. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 6) The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions. Answer: TRUE Explanation: The relatively low correlation between the movements of stock markets in different countries indicates that countries pursue different macroeconomic policies and face different economic conditions. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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7) Using floating exchange rates will help countries reduce the risk of investing in foreign assets. Answer: FALSE Explanation: The risk-reducing effects of international portfolio diversification would be greater were it not for the volatile exchange rates associated with the current floating exchange rate regime. Floating exchange rates introduce an additional element of risk into investing in foreign assets. Difficulty: 2 Medium Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 8) Financial services is an information-intensive industry. Answer: TRUE Explanation: Financial services is an information-intensive industry. It draws on large volumes of information about markets, risks, exchange rates, interest rates, creditworthiness, and so on. Difficulty: 1 Easy Topic: Growth of Global Capital Markets Learning Objective: 12-02 Identify why the global capital market has grown so rapidly. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 9) The cost of recording, transmitting, and processing information has doubled with advancements in technology since 1964. Answer: FALSE Explanation: According to one study, because of these technological developments, the real cost of recording, transmitting, and processing information fell by 95 percent between 1964 and 1990. It seems likely that the cost of recording, transmitting, and processing information has fallen by a similar amount since 1990 and is now trivial. Difficulty: 1 Easy Topic: Growth of Global Capital Markets Learning Objective: 12-02 Identify why the global capital market has grown so rapidly. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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10) Financial services has historically been the most tightly regulated of all industries. Answer: TRUE Explanation: In country after country, financial services has historically been the most tightly regulated of all industries. Difficulty: 1 Easy Topic: Growth of Global Capital Markets Learning Objective: 12-02 Identify why the global capital market has grown so rapidly. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 11) The Eurocurrency market has been one cause of a decrease in global financial regulations. Answer: TRUE Explanation: In part, this has been a response to the development of the Eurocurrency market, which from the beginning was outside national control. Increasing acceptance of the free market ideology associated with an individualistic political philosophy also has a lot to do with the global trend toward the deregulation of financial markets. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-02 Identify why the global capital market has grown so rapidly. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 12) The globalization of capital has been universally seen as a positive development. Answer: FALSE Explanation: While most commentators see the globalization of capital as a positive development, some believe it holds inherent serious risks. Difficulty: 1 Easy Topic: Growth of Global Capital Markets Learning Objective: 12-02 Identify why the global capital market has grown so rapidly. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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13) Economist Martin Feldstein has coined the term "hot money" to pertain to long-term capital flows. Answer: FALSE Explanation: Harvard economist Martin Feldstein has argued that most of the capital that moves internationally is pursuing temporary gains, and it shifts in and out of countries as quickly as conditions change. He distinguishes between this short-term capital, or "hot money," and "patient money" that would support long-term cross-border capital flows. Difficulty: 1 Easy Topic: Risks Associated with Global Capital Markets Learning Objective: 12-03 Understand the risks associated with the globalization of capital markets. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 14) The global capital market often lacks information about the fundamental quality of foreign investments. Answer: TRUE Explanation: A lack of information about the fundamental quality of foreign investments may encourage speculative flows in the global capital market. Faced with a lack of quality information, investors may react to dramatic news events in foreign nations and pull their money out too quickly. Difficulty: 1 Easy Topic: Risks Associated with Global Capital Markets Learning Objective: 12-03 Understand the risks associated with the globalization of capital markets. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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15) If the international capital market continues to grow, financial intermediaries likely will provide less quality information about foreign investment opportunities. Answer: FALSE Explanation: Many investors have yet to venture into the world of cross-border investing, and those that do are prone to reverse their decision on the basis of limited (and perhaps inaccurate) information. However, if the international capital market continues to grow, financial intermediaries likely will increasingly provide quality information about foreign investment opportunities. Difficulty: 1 Easy Topic: Risks Associated with Global Capital Markets Learning Objective: 12-03 Understand the risks associated with the globalization of capital markets. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 16) Eurocurrency can be created anywhere in the world. Answer: TRUE Explanation: Eurocurrency can be created anywhere in the world. The persistent Euro- prefix reflects the European origin of the market. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 17) Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency. Answer: TRUE Explanation: The Eurocurrency market lacks government regulation. The lack of regulation allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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18) The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates. Answer: FALSE Explanation: Banks offer higher interest rates on Eurocurrency deposits than on deposits made in the home currency. The lack of regulation also allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for borrowings in the home currency. This makes the spread between the Eurocurrency deposit rate and the Eurocurrency lending rate less than the spread between the domestic deposit and lending rates. Difficulty: 2 Medium Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 19) Governments give banks less freedom when they deal in foreign currencies. Answer: FALSE Explanation: Banks are given much more freedom in their dealings in foreign currencies. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 20) Depositors are not protected against bank failures in the Eurocurrency market. Answer: TRUE Explanation: When depositors use a regulated banking system, the probability of a bank failure that would cause them to lose their deposits is very low. In an unregulated system such as the Eurocurrency market, the probability of a bank failure that would cause depositors to lose their money is greater (although, in absolute terms, still low). Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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21) Foreign bonds are sold within the borrower's country and are denominated in the currency of the country in which they are issued. Answer: FALSE Explanation: Foreign bonds are sold outside of the borrower's country and are denominated in the currency of the country in which they are issued. Difficulty: 1 Easy Topic: Currency Management and Business Strategy in the Global Monetary System Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 22) Eurobonds are usually offered to residents of the country in whose currency they are denominated. Answer: FALSE Explanation: Eurobonds are usually offered simultaneously in several national capital markets, but neither in the capital market of the country, nor to residents of the country, in whose currency they are denominated. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 23) Government limitations are more severe for securities denominated in foreign currencies than for domestic securities. Answer: FALSE Explanation: Government limitations are generally less stringent for securities denominated in foreign currencies and sold to holders of those foreign currencies. Difficulty: 1 Easy Topic: Trade Policy and Government Intervention in International Trade Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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24) Eurobonds fall within the regulatory domain of the European Economic Community. Answer: FALSE Explanation: Eurobonds fall outside of the regulatory domain of any single nation. As such, they can often be issued at a lower cost to the issuer. Difficulty: 1 Easy Topic: The Eurocurrency Market Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 25) Historically, regulatory barriers have made national equity markets work together. Answer: FALSE Explanation: Historically, substantial regulatory barriers separated national equity markets from each other. Difficulty: 1 Easy Topic: Trade Policy and Government Intervention in International Trade Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the Eurocurrency market, the global bond market, and the global equity market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 26) 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. Answer: FALSE Explanation: Movements in foreign exchange rates can substantially increase the cost of foreign currency loans. In this case, the value of the loan increases as the U.S. dollar appreciates. Difficulty: 2 Medium Topic: Foreign Exchange Risk and the Cost of Capital Learning Objective: 12-05 Understand how foreign exchange risks affect the cost of capital. Bloom's: Analyze AACSB: Analytical Thinking Accessibility: Keyboard Navigation

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27) The forward exchange market does not provide adequate coverage for long-term borrowings. Answer: TRUE Explanation: Although using forward exchange markets may lower foreign exchange risk with short-term borrowings, it cannot remove the risk. Most important, the forward exchange market does not provide adequate coverage for long-term borrowings. Difficulty: 1 Easy Topic: Foreign Exchange Risk and the Cost of Capital Learning Objective: 12-05 Understand how foreign exchange risks affect the cost of capital. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 28) 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. Answer: A Explanation: Market makers are the financial service companies that connect investors and borrowers. Those who want to invest money include corporations with surplus cash, individuals, and nonbank financial institutions. Those who want to borrow money include individuals, companies, and governments. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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29) ________ perform a direct connection function in capital markets. A) Insurance brokers B) Investment banks C) Pension fund managers D) Commercial banks Answer: B Explanation: Market makers are the financial service companies that connect investors and borrowers. They include commercial banks and investment banks. Commercial banks perform an indirect connection function. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 30) ________ 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 Answer: C Explanation: A debt loan requires the corporation to repay a predetermined portion of the loan amount (the sum of the principal plus the specified interest) at regular intervals regardless of how much profit it is making. Difficulty: 1 Easy Topic: Benefits of the Global Capital Market Learning Objective: 12-01 Describe the benefits of the global capital market. Bloom's:...