Question 1

A firm's net worth is equal to the value of its

Accepted Answer

A) assets minus the value of its liabilities. 
B) liabilities minus the value of its assets. 
C) common stock minus the value of its outstanding bonds. 
D) outstanding bonds minus the value of its common stock. 
A) assets minus the value of its liabilities. 
B) liabilities minus the value of its assets. 
C) common stock minus the value of its outstanding bonds. 
D) outstanding bonds minus the value of its common stock.

Question 2

The use of collateral

Accepted Answer

A) allows banks to charge higher interest rates on loans. 
B) makes it more costly for borrowers to take advantage of their asymmetric information. 
C) makes it more costly for lenders to take advantage of their asymmetric information. 
D) has important tax implications for both borrowers and lenders. 
A) allows banks to charge higher interest rates on loans. 
B) makes it more costly for borrowers to take advantage of their asymmetric information. 
C) makes it more costly for lenders to take advantage of their asymmetric information. 
D) has important tax implications for both borrowers and lenders.

Question 3

When there's asymmetric information, who tends to have the better information?

Accepted Answer

A) lender 
B) borrower 
C) intermediary 
D) equally likely to be the borrower or the lender 
A) lender 
B) borrower 
C) intermediary 
D) equally likely to be the borrower or the lender

Question 4

Financial intermediaries are able to act as delegated monitors for individual savers because

Accepted Answer

A) other investors are unable to gain a free ride on their monitoring efforts. 
B) borrowers consider this role to be traditional for financial intermediaries and are willing to put up with it. 
C) the federal government has granted them waivers from laws protecting privacy. 
D) they employ a vast network of private detectives to carry out their monitoring role. 
A) other investors are unable to gain a free ride on their monitoring efforts. 
B) borrowers consider this role to be traditional for financial intermediaries and are willing to put up with it. 
C) the federal government has granted them waivers from laws protecting privacy. 
D) they employ a vast network of private detectives to carry out their monitoring role.

Question 5

The presence of transactions costs and information costs

Accepted Answer

A) lowers the cost of funds to borrowers. 
B) raises the cost of funds to borrowers. 
C) raises the expected return to lenders. 
D) increases the efficiency of the financial system. 
A) lowers the cost of funds to borrowers. 
B) raises the cost of funds to borrowers. 
C) raises the expected return to lenders. 
D) increases the efficiency of the financial system.

Question 6

Transaction and information costs

Accepted Answer

A) benefit borrowers at the expense of savers 
B) benefit savers at the expense of borrowers 
C) transaction costs hurt savers while information costs hurt borrowers 
D) create profit opportunities for those who can reduce these costs 
A) benefit borrowers at the expense of savers 
B) benefit savers at the expense of borrowers 
C) transaction costs hurt savers while information costs hurt borrowers 
D) create profit opportunities for those who can reduce these costs

Question 7

With debt financing

Accepted Answer

A) moral hazard problems are eliminated. 
B) moral hazard problems are reduced but not eliminated. 
C) adverse selection problems are eliminated. 
D) firms reduce the risk that they will become bankrupt during a recession. 
A) moral hazard problems are eliminated. 
B) moral hazard problems are reduced but not eliminated. 
C) adverse selection problems are eliminated. 
D) firms reduce the risk that they will become bankrupt during a recession.

Question 8

Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

Accepted Answer

A) The Securities and Exchange Commission 
B) The Federal Trade Commission 
C) The National Accounting Board 
D) The Fair Reporting Commission 
A) The Securities and Exchange Commission 
B) The Federal Trade Commission 
C) The National Accounting Board 
D) The Fair Reporting Commission

Question 9

Acme Widget tells investors it wants to build a new widget factory and sell investors $10,000,000 in bonds to finance it. Once they have raised the $10,000,000 the owners of Acme Widget use the funds to finance a trip to Atlantic City to try out a new scheme they have devised to win at blackjack. This is an example of

Accepted Answer

A) the adverse selection problem in financial markets. 
B) the moral hazard problem in financial markets. 
C) the difficulty lenders have in distinguishing good from lemon firms. 
D) the problems with using rational expectations in financial markets. 
A) the adverse selection problem in financial markets. 
B) the moral hazard problem in financial markets. 
C) the difficulty lenders have in distinguishing good from lemon firms. 
D) the problems with using rational expectations in financial markets.

Question 10

What solution did most financial experts suggest be undertaken in response to the poorly developed financial markets in the 1990s?

Accepted Answer

A) Efforts should focus on organizing financial intermediaries. 
B) Governments should allocate funds to the appropriate borrowers. 
C) Hundreds of billions of dollars should be spent to develop financial markets. 
D) The nations should rely on global financial markets and not develop their own. 
A) Efforts should focus on organizing financial intermediaries. 
B) Governments should allocate funds to the appropriate borrowers. 
C) Hundreds of billions of dollars should be spent to develop financial markets. 
D) The nations should rely on global financial markets and not develop their own.

Question 11

Small savers face

Accepted Answer

A) low transactions costs in financial markets. 
B) high transactions costs in financial intermediaries. 
C) low transactions costs in financial intermediaries. 
D) low information costs in financial intermediaries, but high transactions costs. 
A) low transactions costs in financial markets. 
B) high transactions costs in financial intermediaries. 
C) low transactions costs in financial intermediaries. 
D) low information costs in financial intermediaries, but high transactions costs.

Question 12

Which of the following is NOT an example of transactions costs?

Accepted Answer

A) High interest rates 
B) Lawyers' fees 
C) Brokerage commissions 
D) Minimum investment requirements 
A) High interest rates 
B) Lawyers' fees 
C) Brokerage commissions 
D) Minimum investment requirements

Question 13

SEC Regulation Fair Disclosure (FD)

Accepted Answer

A) has eliminated adverse selection problems in financial markets. 
B) require companies to release material information to the general public at the same time it is released to Wall Street professionals. 
C) bars trading in securities on the basis of insider information. 
D) was repealed in August 2000 as a result of the increasing amounts of financial information now available on the Internet. 
A) has eliminated adverse selection problems in financial markets. 
B) require companies to release material information to the general public at the same time it is released to Wall Street professionals. 
C) bars trading in securities on the basis of insider information. 
D) was repealed in August 2000 as a result of the increasing amounts of financial information now available on the Internet.

Question 14

The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of information on the filthy conditions in its factory, which had long been known to management, leaking out to the general public. This incident is best thought of as an example of

Accepted Answer

A) symmetric information in the financial markets. 
B) asymmetric information in the financial markets. 
C) moral hazard in the financial markets. 
D) the generally poor state of sanitation in the food-processing industry in the United States. 
A) symmetric information in the financial markets. 
B) asymmetric information in the financial markets. 
C) moral hazard in the financial markets. 
D) the generally poor state of sanitation in the food-processing industry in the United States.

Question 15

The adverse selection problem in financial markets creates a profit opportunity because

Accepted Answer

A) it opens a gap between the cost of short-term funds and the cost of long-term funds. 
B) it results in the value of a company's stock being well below the value of the company's assets. 
C) borrowers are willing to pay to communicate information about their prospects. 
D) it makes bond-financed projects cheaper than stock-financed projects. 
A) it opens a gap between the cost of short-term funds and the cost of long-term funds. 
B) it results in the value of a company's stock being well below the value of the company's assets. 
C) borrowers are willing to pay to communicate information about their prospects. 
D) it makes bond-financed projects cheaper than stock-financed projects.

Question 16

The decline in the use of equity finance and the increase in corporate borrowings during the 1980s might be explained as an attempt by firms to

Accepted Answer

A) avoid the strict regulations surrounding new issues of common stock. 
B) avoid adverse selection problems. 
C) disguise questionable expenditures from shareholders. 
D) mitigate principal-agent problems. 
A) avoid the strict regulations surrounding new issues of common stock. 
B) avoid adverse selection problems. 
C) disguise questionable expenditures from shareholders. 
D) mitigate principal-agent problems.

Question 17

Moody's Investors Service is able to make a profit because

Accepted Answer

A) most investors are irrational. 
B) of the existence of adverse selection problems. 
C) fluctuations in interest rates make default risk on corporate bonds difficult to gauge. 
D) small investors like the mutual funds they sell. 
A) most investors are irrational. 
B) of the existence of adverse selection problems. 
C) fluctuations in interest rates make default risk on corporate bonds difficult to gauge. 
D) small investors like the mutual funds they sell.

Question 18

Symmetric information

Accepted Answer

A) is the same as perfect information. 
B) holds under the assumption of rational expectations. 
C) is true only in efficient markets. 
D) means that savers and borrowers have the same information. 
A) is the same as perfect information. 
B) holds under the assumption of rational expectations. 
C) is true only in efficient markets. 
D) means that savers and borrowers have the same information.

Question 19

Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information

Accepted Answer

A) eliminate the adverse selection problem (when rigorously enforced). 
B) increase the difficulty that young firms may have in raising funds. 
C) eliminate the moral hazard problem in securities markets. 
D) fail to eliminate the adverse selection problem, in part because they do not greatly reduce the difficulty that young firms have in raising funds. 
A) eliminate the adverse selection problem (when rigorously enforced). 
B) increase the difficulty that young firms may have in raising funds. 
C) eliminate the moral hazard problem in securities markets. 
D) fail to eliminate the adverse selection problem, in part because they do not greatly reduce the difficulty that young firms have in raising funds.

Question 20

Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of

Accepted Answer

A) lemon problem. 
B) moral hazard. 
C) adverse selection. 
D) asymmetric information. 
A) lemon problem. 
B) moral hazard. 
C) adverse selection. 
D) asymmetric information.

Exam 11: Reducing Transactions Costs and Information Costs

A firm's net worth is equal to the value of its

The use of collateral

When there's asymmetric information, who tends to have the better information?

Financial intermediaries are able to act as delegated monitors for individual savers because

The presence of transactions costs and information costs

Transaction and information costs

With debt financing

Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

What solution did most financial experts suggest be undertaken in response to the poorly developed financial markets in the 1990s?

Small savers face

Which of the following is NOT an example of transactions costs?

SEC Regulation Fair Disclosure (FD)

The adverse selection problem in financial markets creates a profit opportunity because

The decline in the use of equity finance and the increase in corporate borrowings during the 1980s might be explained as an attempt by firms to

Moody's Investors Service is able to make a profit because

Symmetric information

Government regulations requiring firms that desire to sell securities in financial markets to disclose all available information

Suppose some members of Enron's board of directors are aware of the company's true financial condition, information that is not available to most investors. This is an example of

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters