Question 1

As information technology improves, the lending role of financial institutions such as banks should

Accepted Answer

A)  increase somewhat. 
B)  decrease. 
C)  stay the same. 
D)  increase significantly. 
A)  increase somewhat. 
B)  decrease. 
C)  stay the same. 
D)  increase significantly.

Question 2

That only large, well-established corporations have access to securities markets

Accepted Answer

A)  explains why indirect finance is such an important source of external funds for businesses. 
B)  can be explained by the problem of moral hazard. 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets. 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds. 
A)  explains why indirect finance is such an important source of external funds for businesses. 
B)  can be explained by the problem of moral hazard. 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets. 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds.

Question 3

Government regulations designed to reduce the moral hazard problem include

Accepted Answer

A)  laws that force firms to adhere to standard accounting principles. 
B)  light sentences for those who commit the fraud of hiding and stealing profits. 
C)  state verification subsidies. 
D)  state licensing restrictions. 
A)  laws that force firms to adhere to standard accounting principles. 
B)  light sentences for those who commit the fraud of hiding and stealing profits. 
C)  state verification subsidies. 
D)  state licensing restrictions.

Question 4

The reduction in transactions costs per dollar of investment as the size of transactions increases is

Accepted Answer

A)  discounting. 
B)  economies of scale. 
C)  economies of trade. 
D)  diversification. 
A)  discounting. 
B)  economies of scale. 
C)  economies of trade. 
D)  diversification.

Question 5

Debt contracts

Accepted Answer

A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B)  have a higher cost of state verification than equity contracts. 
C)  are used less frequently to raise capital than are equity contracts. 
D)  never result in a loss for the lender. 
A)  are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B)  have a higher cost of state verification than equity contracts. 
C)  are used less frequently to raise capital than are equity contracts. 
D)  never result in a loss for the lender.

Question 6

Collateralized debt is also know as

Accepted Answer

A)  unsecured debt. 
B)  secured debt. 
C)  unrestricted debt. 
D)  promissory debt. 
A)  unsecured debt. 
B)  secured debt. 
C)  unrestricted debt. 
D)  promissory debt.

Question 7

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 8

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

Accepted Answer

A)  Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. 
B)  Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. 
C)  Direct finance accounts for more than 50 percent of the external financing of American businesses. 
D)  Smaller businesses almost always raise funds by issuing marketable securities. 
A)  Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. 
B)  Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. 
C)  Direct finance accounts for more than 50 percent of the external financing of American businesses. 
D)  Smaller businesses almost always raise funds by issuing marketable securities.

Question 9

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 10

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

Accepted Answer

A)  expertise 
B)  diversification 
C)  regulations 
D)  equity 
A)  expertise 
B)  diversification 
C)  regulations 
D)  equity

Question 11

The problem of adverse selection helps to explain

Accepted Answer

A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. 
B)  why collateral is an important feature of consumer, but not business, debt contracts. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why lenders refuse loans to individuals with high net worth. 
A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. 
B)  why collateral is an important feature of consumer, but not business, debt contracts. 
C)  why direct finance is more important than indirect finance as a source of business finance. 
D)  why lenders refuse loans to individuals with high net worth.

Question 12

Equity contracts account for a small fraction of external funds raised by American businesses because

Accepted Answer

A)  costly state verification makes the equity contract less desirable than the debt contract. 
B)  of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts. 
C)  equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D)  there is no moral hazard problem when using a debt contract. 
A)  costly state verification makes the equity contract less desirable than the debt contract. 
B)  of the reduced scope for moral hazard problems under equity contracts, as compared to debt contracts. 
C)  equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D)  there is no moral hazard problem when using a debt contract.

Question 13

Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

Accepted Answer

A)  moral hazard 
B)  agency theory 
C)  diversification 
D)  the "lemons" problem 
A)  moral hazard 
B)  agency theory 
C)  diversification 
D)  the "lemons" problem

Question 14

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

Accepted Answer

A)  adverse selection; moral hazard 
B)  moral hazard; adverse selection 
C)  costly state verification; free-riding 
D)  free-riding; costly state verification 
A)  adverse selection; moral hazard 
B)  moral hazard; adverse selection 
C)  costly state verification; free-riding 
D)  free-riding; costly state verification

Question 15

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  diversification. 
A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  diversification.

Question 16

American businesses get their external funds primarily from

Accepted Answer

A)  bank loans. 
B)  bonds and commercial paper issues. 
C)  stock issues. 
D)  loans from nonbank financial intermediaries. 
A)  bank loans. 
B)  bonds and commercial paper issues. 
C)  stock issues. 
D)  loans from nonbank financial intermediaries.

Question 17

External financing by ________ should be more important in developing countries than in industrialized countries because information about private firms is more difficult to collect in developing countries.

Accepted Answer

A)  financial intermediaries 
B)  bonds 
C)  stock 
D)  direct lending 
A)  financial intermediaries 
B)  bonds 
C)  stock 
D)  direct lending

Question 18

Why does the free-rider problem occur in the debt market?

Accepted Answer

Restrictive covenants can reduce moral h

Question 19

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

Accepted Answer

Collateral is property that is promised

Question 20

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?

Accepted Answer

A)  Issuing marketable securities is the primary way that they finance their activities. 
B)  Bonds are the least important source of external funds to finance their activities. 
C)  Stocks are a relatively unimportant source of finance for their activities. 
D)  Selling bonds directly to the American household is a major source of funding for American businesses. 
A)  Issuing marketable securities is the primary way that they finance their activities. 
B)  Bonds are the least important source of external funds to finance their activities. 
C)  Stocks are a relatively unimportant source of finance for their activities. 
D)  Selling bonds directly to the American household is a major source of funding for American businesses.

Exam 8: An Economic Analysis of Financial Structure

As information technology improves, the lending role of financial institutions such as banks should

That only large, well-established corporations have access to securities markets

Government regulations designed to reduce the moral hazard problem include

The reduction in transactions costs per dollar of investment as the size of transactions increases is

Debt contracts

Collateralized debt is also know as

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.

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

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

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

The problem of adverse selection helps to explain

Equity contracts account for a small fraction of external funds raised by American businesses because

Although debt contracts require less monitoring than equity contracts, debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

By bundling share purchases of many investors together mutual funds can take advantage of economies of scale and thereby lower

American businesses get their external funds primarily from

External financing by ________ should be more important in developing countries than in industrialized countries because information about private firms is more difficult to collect in developing countries.

Why does the free-rider problem occur in the debt market?

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

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true?

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

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

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

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

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 problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called .