Question 1

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

Accepted Answer

A) collateral-insurance clause. 
B) prescription covenant. 
C) restrictive covenant. 
D) proscription covenant. 
A) collateral-insurance clause. 
B) prescription covenant. 
C) restrictive covenant. 
D) proscription covenant. C

Question 2

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender.This inequality of information is called

Accepted Answer

A) moral hazard. 
B) asymmetric information. 
C) noncollateralized risk. 
D) adverse selection. 
A) moral hazard. 
B) asymmetric information. 
C) noncollateralized risk. 
D) adverse selection. B

Question 3

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Accepted Answer

A) liquidity 
B) conduction 
C) transcendental 
D) equitable 
A) liquidity 
B) conduction 
C) transcendental 
D) equitable A

Question 4

Explain the principal-agent problem as it pertains to equity contracts.

Accepted Answer

The principals are the stockholders who

Question 5

Managers (________)may act in their own interest rather than in the interest of the stockholder-owners (________)because the managers have less incentive to maximize profits than the stockholder-owners do.

Accepted Answer

A) principals; agents 
B) principals; principals 
C) agents; agents 
D) agents; principals 
A) principals; agents 
B) principals; principals 
C) agents; agents 
D) agents; principals

Question 6

One possible reason for slower growth in developing and transition countries is

Accepted Answer

A) capital may not be directed to its most productive use. 
B) strict accounting standards are too stringent for the banks to meet. 
C) the weak link between government and financial intermediaries. 
D) the lack of adverse selection and moral hazard problems. 
A) capital may not be directed to its most productive use. 
B) strict accounting standards are too stringent for the banks to meet. 
C) the weak link between government and financial intermediaries. 
D) the lack of adverse selection and moral hazard problems.

Question 7

The principal-agent problem

Accepted Answer

A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C) would not arise if the owners of the firm had complete information about the activities of the managers. 
D) explains why direct finance is more important than indirect finance as a source of business finance. 
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) in financial markets helps to explain why equity is a relatively important source of finance for American business. 
C) would not arise if the owners of the firm had complete information about the activities of the managers. 
D) explains why direct finance is more important than indirect finance as a source of business finance.

Question 8

Nonfinancial businesses in Germany,Japan,and Canada raise most of their funds

Accepted Answer

A) by issuing stock. 
B) by issuing bonds. 
C) from nonbank loans. 
D) from bank loans. 
A) by issuing stock. 
B) by issuing bonds. 
C) from nonbank loans. 
D) from bank loans.

Question 9

Which of the following is not one of the eight basic puzzles about financial structure?

Accepted Answer

A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance,which involves the activities of financial intermediaries,is many times more important than direct finance,in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system. 
A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance,which involves the activities of financial intermediaries,is many times more important than direct finance,in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system.

Question 10

Equity contracts

Accepted Answer

A) are claims to a share in the profits and assets of a business. 
B) have the advantage over debt contracts of a lower costly state verification. 
C) are used much more frequently to raise capital than are debt contracts. 
D) are not subject to the moral hazard problem. 
A) are claims to a share in the profits and assets of a business. 
B) have the advantage over debt contracts of a lower costly state verification. 
C) are used much more frequently to raise capital than are debt contracts. 
D) are not subject to the moral hazard problem.

Question 11

How does collateral help to reduce the adverse selection problem in credit market?

Accepted Answer

Collateral is property that is promised

Question 12

The concept of adverse selection helps to explain

Accepted Answer

A) why collateral is not a common feature of many debt contracts. 
B) why large,well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) why stocks are the most important source of external financing for businesses. 
A) why collateral is not a common feature of many debt contracts. 
B) why large,well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) why stocks are the most important source of external financing for businesses.

Question 13

One reason financial systems in developing and transition countries are underdeveloped is

Accepted Answer

A) they have weak links to their governments. 
B) they make loans only to nonprofit entities. 
C) the legal system may be poor making it difficult to enforce restrictive covenants. 
D) the accounting standards are too stringent for the banks to meet. 
A) they have weak links to their governments. 
B) they make loans only to nonprofit entities. 
C) the legal system may be poor making it difficult to enforce restrictive covenants. 
D) the accounting standards are too stringent for the banks to meet.

Question 14

The predominant form of household debt is

Accepted Answer

A) consumer installment debt. 
B) collateralized debt. 
C) unsecured debt. 
D) unrestricted debt. 
A) consumer installment debt. 
B) collateralized debt. 
C) unsecured debt. 
D) unrestricted debt.

Question 15

The free-rider problem occurs because

Accepted Answer

A) people who pay for information use it freely. 
B) people who do not pay for information use it. 
C) information can never be sold at any price. 
D) it is never profitable to produce information. 
A) people who pay for information use it freely. 
B) people who do not pay for information use it. 
C) information can never be sold at any price. 
D) it is never profitable to produce information.

Question 16

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

Accepted Answer

A) owners; customers 
B) owners; managers 
C) managers; customers 
D) managers; owners 
A) owners; customers 
B) owners; managers 
C) managers; customers 
D) managers; owners

Question 17

Of the sources of external funds for nonfinancial businesses in the United States,loans from banks and other financial intermediaries account for approximately ________ of the total.

Accepted Answer

A) 6% 
B) 40% 
C) 56% 
D) 60% 
A) 6% 
B) 40% 
C) 56% 
D) 60%

Question 18

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation 
A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation

Question 19

Of the four sources of external funding for nonfinancial businesses,the least often used in the U.S.is

Accepted Answer

A) bank loans. 
B) nonbank loans. 
C) bonds. 
D) stock. 
A) bank loans. 
B) nonbank loans. 
C) bonds. 
D) stock.

Question 20

One way the venture capital firm avoids the free-rider problem is by

Accepted Answer

A) prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B) prohibiting members from serving on the board of directors. 
C) prohibiting the borrowing firm from replacing management. 
D) requiring collateral equal to the value of the borrowed funds. 
A) prohibiting the sale of equity in the firm to anyone except the venture capital firm. 
B) prohibiting members from serving on the board of directors. 
C) prohibiting the borrowing firm from replacing management. 
D) requiring collateral equal to the value of the borrowed funds.

Exam 8: An Economic Analysis of Financial Structure

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender.This inequality of information is called

Financial intermediaries' low transaction costs allow them to provide ________ services that make it easier for customers to conduct transactions.

Explain the principal-agent problem as it pertains to equity contracts.

Managers (________)may act in their own interest rather than in the interest of the stockholder-owners (________)because the managers have less incentive to maximize profits than the stockholder-owners do.

One possible reason for slower growth in developing and transition countries is

The principal-agent problem

Nonfinancial businesses in Germany,Japan,and Canada raise most of their funds

Which of the following is not one of the eight basic puzzles about financial structure?

Equity contracts

How does collateral help to reduce the adverse selection problem in credit market?

The concept of adverse selection helps to explain

One reason financial systems in developing and transition countries are underdeveloped is

The predominant form of household debt is

The free-rider problem occurs because

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the ________.

Of the sources of external funds for nonfinancial businesses in the United States,loans from banks and other financial intermediaries account for approximately ________ of the total.

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Of the four sources of external funding for nonfinancial businesses,the least often used in the U.S.is

One way the venture capital firm avoids the free-rider problem is by

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

Managers ()may act in their own interest rather than in the interest of the stockholder-owners ()because the managers have less incentive to maximize profits than the stockholder-owners do.

The principal-agent problem would not occur if of a firm had complete information about actions of the .