Question 1

Asymmetric information problems increase costs to both borrowers and lenders.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following does NOT involve a financial intermediary?

Accepted Answer

A)  saving for retirement 
B)  taking a loan to start a business 
C)  buying stock online 
D)  none of the above 
A)  saving for retirement 
B)  taking a loan to start a business 
C)  buying stock online 
D)  none of the above

Question 3

Asymmetric information leads to market inefficiencies.

Accepted Answer

A) True 
 B)False

Question 4

What are stock options?

Accepted Answer

Stock options are a type of co

Question 5

Which of the following is a technique lenders use to alleviate asymmetric information problems?

Accepted Answer

A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above 
A)  checking credit ratings 
B)  monitoring borrower activity 
C)  restrictive covenants 
D)  all of the above

Question 6

The majority of external finance comes from corporate bond issues.

Accepted Answer

A) True 
 B)False

Question 7

Asymmetric information:

Accepted Answer

A)  decreases the efficiency of financial markets. 
B)  reduces the flow of funds to entrepreneurs. 
C)  injures the real economy 
D)  all of the above. 
A)  decreases the efficiency of financial markets. 
B)  reduces the flow of funds to entrepreneurs. 
C)  injures the real economy 
D)  all of the above.

Question 8

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Accepted Answer

Requiring collateral will deter borrower

Question 9

The free-rider problem affects the

Accepted Answer

A)  stock market. 
B)  corporate bond market. 
C)  both of the above. 
D)  neither of the above. 
A)  stock market. 
B)  corporate bond market. 
C)  both of the above. 
D)  neither of the above.

Question 10

The majority of internal finance for firms comes from loans for intermediaries.

Accepted Answer

A) True 
 B)False

Question 11

Restrictive covenants are required by lenders to help solve the problem of

Accepted Answer

A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  all of the above. 
A)  adverse selection. 
B)  moral hazard. 
C)  transactions costs. 
D)  all of the above.

Question 12

Intermediaries must charge higher rates of interest than individuals.

Accepted Answer

A) True 
 B)False

Question 13

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

Accepted Answer

A) True 
 B)False

Question 14

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Accepted Answer

If managers are compensated with stock,

Question 15

Credit rationing means that banks refuse to lend above a certain interest rate. Why would they do this? What does this policy have to do with adverse selection or moral hazard?

Accepted Answer

Borrowers who are willing to t

Question 16

Firms that pay efficiency wages are attempting to minimize

Accepted Answer

A)  agency costs. 
B)  moral hazard problems. 
C)  asymmetric information. 
D)  all of the above. 
A)  agency costs. 
B)  moral hazard problems. 
C)  asymmetric information. 
D)  all of the above.

Question 17

Which of the following are examples of transactions costs faced by lenders?

Accepted Answer

A)  accounting fees 
B)  legal fees 
C)  monitoring costs 
D)  all of the above 
A)  accounting fees 
B)  legal fees 
C)  monitoring costs 
D)  all of the above

Question 18

The majority of external finance for firms comes from stock issues.

Accepted Answer

A) True 
 B)False

Question 19

The cost of accounting fees is an example of a transactions cost that banks can deal with more efficiently than individuals.

Accepted Answer

A) True 
 B)False

Question 20

The free-rider problem affects decisions of participants in

Accepted Answer

A)  the stock market. 
B)  IPOs. 
C)  both of the above. 
D)  neither of the above. 
A)  the stock market. 
B)  IPOs. 
C)  both of the above. 
D)  neither of the above.

Exam 8: Financial Structure, Transaction Costs, and Asymmetric Information

Asymmetric information problems increase costs to both borrowers and lenders.

Which of the following does NOT involve a financial intermediary?

Asymmetric information leads to market inefficiencies.

What are stock options?

Which of the following is a technique lenders use to alleviate asymmetric information problems?

The majority of external finance comes from corporate bond issues.

Asymmetric information:

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

The free-rider problem affects the

The majority of internal finance for firms comes from loans for intermediaries.

Restrictive covenants are required by lenders to help solve the problem of

Intermediaries must charge higher rates of interest than individuals.

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Credit rationing means that banks refuse to lend above a certain interest rate. Why would they do this? What does this policy have to do with adverse selection or moral hazard?

Firms that pay efficiency wages are attempting to minimize

Which of the following are examples of transactions costs faced by lenders?

The majority of external finance for firms comes from stock issues.

The cost of accounting fees is an example of a transactions cost that banks can deal with more efficiently than individuals.

The free-rider problem affects decisions of participants in

The Financial System

Money

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The Economics of Interest-Rate Fluctuations

The Economics of Interest-Rate Spreads and Yield Curves

Rational Expectations, Efficient Markets, and the Valuation of Corporate Equities

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The Economics of Financial Regulation

Financial Derivatives

Financial Crises: Causes and Consequences

Central Bank Form and Function

The Money Supply Process and the Money Multipliers

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International Monetary Regimes

Money Demand

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Aggregate Supply and Demand and the Growth Diamond

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