Faculty of Foreign Languages – Department of Business English BF-Term 5

Full Name: Phạm Thị Thanh Thương Class: .............. Student Code: 11215612
Mark:

TEST 7

 TOPIC 6: FINANCIAL MARKETS 

SECTION 1 - Match the terms with the explanations

Terms Explanations
1 ask price G A Stock on which a fixed dividend must be paid before
common dividends are distributed. It often does not
mature and usually does not give the holder voting
rights in the company.
2 bid price E B Fund created by a provision in many bond contracts that
requires the issuer to set aside each year a portion of the
final maturity payment so that investors can be certain
that the funds will be available at maturity.
3 coupon rate N C Securities that have their periodic interest payments
separated from the final maturity payment and the two
cash flows are sold to different investors.
4 credit default swap F D A measure of how much the market is willing to pay for
(CDS) $1 of earnings from a firm.
5 current yield L E The price market makers pay for the stocks.
6 discount S F A transaction in which one party who wants to hedge
credit risk pays a fixed payment on a regular basis, in
return for a contingent payment that is triggered by a
credit event
7 interest-rate risk M G The price market makers sell the stock for.
8 junk bonds Q H Periodic payments made by equities to shareholders
9 premium P I Bonds for which the source of income that is used to
pay the interest and to retire the bonds is from a specific
source, such as a toll road or an electric plant.
10 registered bonds K K Bonds requiring that their owners register with the
company to receive interest payments.
11 revenue bonds I L An approximation of the yield to maturity that equals
the yearly coupon payment divided by the price of a
coupon bond.
12 dividends H M The possible reduction in returns that is associated with
changes in interest rates.
13 Separate Trading of C N The dollar amount of the yearly coupon payment
Registered Interest and expressed as a percentage of the face value of a coupon
Principal Securities bond.
(STRIPS)
14 NASDAQ T O Bonds that are secured by the full faith and credit of the
issuer, which includes the taxing authority of
municipalities.
15 preferred stock A P The amount paid for an option contract.
 Faculty of Foreign Languages – Department of Business English BF-Term 5

16 price earnings ratio Q Bonds rated lower than BBB by bond rating agencies.

17 sinking fund B R A security that gives the holder an ownership interest in

the issuing firm. This ownership interest includes the
right to any residual cash flows and the right to vote on
major corporate issues.
18 general obligation O S When the bond sells for less than the par value.
bonds
19 common stock R T A computerized network that links dealers around the
country together and provides price quotes on over-the-
counter securities.

SECTION 2 – Fill in the gaps

long-term loans Corporations and the cash flows (7) coupon rate (8) only corporations
governments (6)
(4) (5)

the price (10) Pension (1) the issuing firm (3) mutual funds (2) interest payments

(9)

Maturity (11) the dividends (12) Multiply (13) price earnings ratio

(14)

1. The capital markets exist to provide financing for long-term capital assets. Households, often
through investments in (1) ___________ and (2) ___________, are net investors in the capital
markets.
2. The three main capital market instruments are bonds, stocks, and mortgages. Bonds represent
borrowing by (3) ___________. Stock represents ownership in the issuing firm. Mortgages are
(4) ___________ secured by real property. (5) ___________ can issue stock. (6) ___________
can issue bonds. In any given year, far more funds are raised with bonds than with stock.
3. We compute the value of bonds by finding the present value of (7) ___________, which
consist of periodic interest payments and a final principal payment.
4. The value of bonds fluctuates with current market prices. If a bond has an interest payment
based on a 5% (8) ___________, no investor will buy it at face value if new bonds are available
for the same price with (9) ___________ based on 8% coupon interest. To sell the bond, the
holder will have to discount (10) ___________ until the yield to the holder equals 8%. The
amount of the discount is greater the longer the term to (11) ___________.
5. Stocks are valued as the present value of (12) ___________.
6. An alternative method for estimating a stock price is to (13) ___________ the firm’s earnings
per share times the industry (14) ___________.

SECTION 3 – Multiple Choice Questions

Faculty of Foreign Languages – Department of Business English BF-Term 5

1. The bond markets are important because

A) they are easily the most widely followed financial markets in the United States.

B) they are the markets where interest rates are determined.

C) they are the markets where foreign exchange rates are determined.

D) all of the above.

2. When the price of bonds EXCEEDS the bond market equilibrium price level, then there is a
bonds and the price of bonds can be expected to.

A. excess demand for; rise

B. excess demand for; fall

C. excess supply of; fall

D. excess supply of; rise

3. (I) Debt markets are often referred to generically as the bond market.

(II) A bond is a security that is a claim on the earnings and assets of a corporation.

A) (I) is true, (II) false.

B) (I) is false, (II) true.

C) Both are true.

D) Both are false

4. (I) A bond is a debt security that promises to make payments periodically for a specified
period of time.

(II) A stock is a security that is a claim on the earnings and assets of a corporation.

A) (I) is true, (II) false.

B) (I) is false, (II) true.

C) Both are true.

D) Both are false.

5. A declining stock market index due to lower share prices

A) reduces people's wealth and as a result may reduce their willingness to spend.

B) increases people's wealth and as a result may increase their willingness to spend.

C) decreases the amount of funds that business firms can raise by selling newly issued stock.
Faculty of Foreign Languages – Department of Business English BF-Term 5

D) both A and C of the above.

6. Changes in stock prices

A) affect people's wealth and their willingness to spend.

B) affect firms' decisions to sell stock to finance investment spending.

C) are characterized by considerable fluctuations.

D) all of the above.

7. A stockholderʹs ownership of a companyʹs stock gives her the right to

A) vote and be the primary claimant of all cash flows.

B) vote and be the residual claimant of all cash flows.

C) manage and assume responsibility for all liabilities.

D) vote and assume responsibility for all liabilities.

8. Periodic payments of net earnings to shareholders are known as

A) capital gains.

B) dividends.

C) profits.

D) interest.

9. A stockʹs price will fall if there is

A) a decrease in perceived risk.

B) an increase in the required rate of return.

C) an increase in the future sales price.

D) current dividends are high.

10. A monetary expansion ________ stock prices due to a decrease in the ________ and an
increase in the ________, everything else held constant.

A) reduces; future sales price; expected rate of return

B) reduces; current dividend; expected rate of return

C) increases; required rate of return; future sales price

D) increases; required rate of return; dividend growth rate

Faculty of Foreign Languages – Department of Business English BF-Term 5

11. Dishonest corporate accounting procedures caused stock prices to

A) increase due to higher expected dividend growth and higher future sales price.

B) decrease due to lower expected dividend growth and lower required return.

C) decrease due to lower expected dividend growth and higher required return.

D) increase due to higher expected dividend growth and lower required return.

12. The price of one country's currency in terms of another's is called

A) the foreign exchange rate.

B) the interest rate.

C) the Dow Jones industrial average.

D) none of the above.

13. Bonds that are sold in a foreign country and are denominated in that country's currency are
known as

A) foreign bonds.

B) Eurobonds.

C) Eurocurrencies.

D) Eurodollars.

14. Bonds that are sold in a foreign country and are denominated in a currency other than that of
the country in which they are sold are known as

A) foreign bonds.

B) Eurobonds.

C) Eurocurrencies.

D) Eurodollars.

SECTION 4 – Answer the questions (Homework): Explain why you would be more or less
willing to buy long-term bonds under the following circumstances:

a. Trading in these bonds increases making them easier to sell;

I'd be more willing to buy the bonds, because the heightened level of trading increases the bonds'
liquidity, thereby reducing their risk.

b. Stock prices are expected to decline;

Faculty of Foreign Languages – Department of Business English BF-Term 5

more, because their expected return has risen relative to stocks

c. Broker fees on stocks goes down;

less, because they have become less liquid relative to stocks

d. You expect interest rates to rise;

less, because their expected return has fallen

e. Broker fees on bonds goes down.

I'd be more willing to buy the bonds. The reduced transaction cost would make the bonds
more attractive on a net-of-expenses basis.