Question 1

In order for a signal to be informative,

Accepted Answer

A) it has to be costly for the sender 
B) the cost of signal should be positively related to quality 
C) the first-best outcome must be attainable 
D) all of the above 
E) none of the above 
A) it has to be costly for the sender 
B) the cost of signal should be positively related to quality 
C) the first-best outcome must be attainable 
D) all of the above 
E) none of the above E

Question 2

Use the following information for questions 
Suppose you are a bank lending officer and you are trying to determine if it is worthwhile giving a loan to a potential borrower.You have a prior belief that a borrower is good or bad with equal probability.By gathering information you can determine, albeit imperfectly, whether an applicant is good or bad.If the applicant is good, there is a probability of 0.7 0.3 that your signal reveals that he is good bad.If the applicant is bad, there is a 0.4 0.6 probability that your signal reveals that he is good bad.
-What is your posterior belief that an applicant is bad when your signal tells you that he is goof?

Accepted Answer

A) 0.15 
B) 0.22 
C) 0.30 
D) 0.33 
E) 0.45 
A) 0.15 
B) 0.22 
C) 0.30 
D) 0.33 
E) 0.45 D

Question 3

Use the following information for questions .
There are two possible states of nature, s = 1, and s = 2, over the next period.There are two securities i and j) whose current prices are $10 and $15, respectively.Security i has a payoff of $10 in state s = 1, and $16 in state s = 2, while security j provides $25 in state s = 1 and $8 in state s = 2.
-A third security is introduced.It generates a payoff of $16 in state s = 1 and $24 in state s = 2.How many units of this new security can you buy if your initial wealth is $3,100?

Accepted Answer

A) 200 units 
B) 162 units 
C) 154 units 
D) 127 units 
E) More information is needed 
A) 200 units 
B) 162 units 
C) 154 units 
D) 127 units 
E) More information is needed A

Question 4

An incentive compatibility condition is one where

Accepted Answer

A) an agent must be offered at least his reservation utility in order to agree to a contract with the principal 
B) an agent must offer the principal at least her reservation utility in order to induce her to write a mutually beneficial contract 
C) an agent with a certain type does not have an incentive to mimic the action of another agent of different type 
D) both a and b 
E) both a and c 
A) an agent must be offered at least his reservation utility in order to agree to a contract with the principal 
B) an agent must offer the principal at least her reservation utility in order to induce her to write a mutually beneficial contract 
C) an agent with a certain type does not have an incentive to mimic the action of another agent of different type 
D) both a and b 
E) both a and c

Question 5

Which of the following statements is are false?

Accepted Answer

A) A risk-averse individual demands a premium for bearing risk. 
B) A risk-averse individual prefers a certain amount to a gamble with the same expected value. 
C) A risk-averse individual has a convex utility function. 
D) All of the above. 
E) None of the above. 
A) A risk-averse individual demands a premium for bearing risk. 
B) A risk-averse individual prefers a certain amount to a gamble with the same expected value. 
C) A risk-averse individual has a convex utility function. 
D) All of the above. 
E) None of the above.

Question 6

When a market is incomplete,

Accepted Answer

A) subject to his budget constraint, an individual can achieve any desired distribution of income 
B) an individual has a limited ability to manage uncertainty 
C) the introduction of new securities generally make individuals better off 
D) both a and c 
E) both b and c. 
A) subject to his budget constraint, an individual can achieve any desired distribution of income 
B) an individual has a limited ability to manage uncertainty 
C) the introduction of new securities generally make individuals better off 
D) both a and c 
E) both b and c.

Question 7

The efficient market hypothesis implies that

Accepted Answer

A) investors have perfect forecasting ability. 
B) prices do not fluctuate. 
C) the market is irrational. 
D) competition among investors is such that one can earn only a normal return. 
E) all of the above. 
A) investors have perfect forecasting ability. 
B) prices do not fluctuate. 
C) the market is irrational. 
D) competition among investors is such that one can earn only a normal return. 
E) all of the above.

Question 8

With diversification, an investor can

Accepted Answer

A) reduce risk and increase his return from holding risky assets. 
B) reduce risk due to imperfect correlation of returns among risky assets in his portfolio. 
C) reduce the market risk associated with holding a portfolio of risky assets. 
D) Both a and c. 
E) Both b and c. 
A) reduce risk and increase his return from holding risky assets. 
B) reduce risk due to imperfect correlation of returns among risky assets in his portfolio. 
C) reduce the market risk associated with holding a portfolio of risky assets. 
D) Both a and c. 
E) Both b and c.

Question 9

Consider a game involving two players 1 and 2.Both players have two choices of actions, Left Lor Right R.If both players choose L, the payoff to both players is 5.If both choose R, they each get a payoff of 2.If player 1 chooses L and player 2 chooses R, the payoff is 2 for player 1 and 0 for player 2.If player 1 chooses R and player 2 chooses L, the payoff is 0 for player 1 and 2 for player 2.What is a Nash Equilibrium of this game?

Accepted Answer

A) Both players choose L 
B) Player 1 chooses L and player 2 chooses R 
C) Player 1 chooses R and player 2 chooses L 
D) All of the above 
E) None of the above 
A) Both players choose L 
B) Player 1 chooses L and player 2 chooses R 
C) Player 1 chooses R and player 2 chooses L 
D) All of the above 
E) None of the above

Question 10

In problem 4, if the correlation coefficient is -1 and you want to completely eliminate the risk of the portfolio, then you will invest

Accepted Answer

A) 0.3 in A and 0.7 in B 
B) 0.4 in A and 0.6 in B 
C) 0.6 in A and 0.4 in B 
D) 0.8 in A and 0.2 in B 
E) any combination will eliminate the risk completely since the correlation coefficient is -1 
A) 0.3 in A and 0.7 in B 
B) 0.4 in A and 0.6 in B 
C) 0.6 in A and 0.4 in B 
D) 0.8 in A and 0.2 in B 
E) any combination will eliminate the risk completely since the correlation coefficient is -1

Question 11

Which of the following statements is are false about options?

Accepted Answer

A) A call option is more valuable when the value of the underlying security is more volatile. 
B) An American option can never be worth less than a European option. 
C) An option buyer has the right, not the obligation, to buy or sell an asset at a predetermined price over a fixed time interval. 
D) A put option is more valuable when the value of the underlying security is less volatile. 
E) All of the above is false. 
A) A call option is more valuable when the value of the underlying security is more volatile. 
B) An American option can never be worth less than a European option. 
C) An option buyer has the right, not the obligation, to buy or sell an asset at a predetermined price over a fixed time interval. 
D) A put option is more valuable when the value of the underlying security is less volatile. 
E) All of the above is false.

Question 12

In a market with asymmetric information,

Accepted Answer

A) market failure may occur and therefore regulation may be needed 
B) individuals are unable to prevent market failure 
C) first-best outcome can always be achieved 
D) both a and c 
E) both b and c 
A) market failure may occur and therefore regulation may be needed 
B) individuals are unable to prevent market failure 
C) first-best outcome can always be achieved 
D) both a and c 
E) both b and c

Question 13

A time-consistent policy is one where

Accepted Answer

A) the parties to a contract are free to renegotiate the contract at a later date 
B) the agent has no incentive to take an action to the detriment of the principal once the contract is agreed upon 
C) the principal can contract directly on the effort level chosen by the agent 
D) the parties to a contract has no incentive to renegotiate it at a later date 
E) both b and c 
A) the parties to a contract are free to renegotiate the contract at a later date 
B) the agent has no incentive to take an action to the detriment of the principal once the contract is agreed upon 
C) the principal can contract directly on the effort level chosen by the agent 
D) the parties to a contract has no incentive to renegotiate it at a later date 
E) both b and c

Question 14

When there is moral hazard between a firm's shareholders and bondholders, the cost of moral hazard is borne by ______in equilibrium.

Accepted Answer

A) the bondholders 
B) the firm's manager 
C) the government 
D) the shareholders 
E) both a and b 
A) the bondholders 
B) the firm's manager 
C) the government 
D) the shareholders 
E) both a and b

Question 15

Consider a firm with risky debt outstanding which requires a repayment one period hence.There are no taxes and the firm has a risky project that can be financed using retained earnings.Assume that the firm's manager acts in the best interest of the shareholders.In this scenario, moral hazard exists if

Accepted Answer

A) the project has a positive net present value and is undertaken so as to maximize the firm's total value 
B) the project has a positive net present value and is undertaken to maximize the shareholders' wealth 
C) the project has a negative net present value and is undertaken to maximize the shareholders' wealth 
D) the project has a zero net present value and is undertaken 
E) moral hazard never exists 
A) the project has a positive net present value and is undertaken so as to maximize the firm's total value 
B) the project has a positive net present value and is undertaken to maximize the shareholders' wealth 
C) the project has a negative net present value and is undertaken to maximize the shareholders' wealth 
D) the project has a zero net present value and is undertaken 
E) moral hazard never exists

Question 16

Use the following information for questions 
There are three types of cars, the good G, the bad B, and the ugly U.A G car is worth $40, a B car is worth $20, and a U car is worth $15.The seller knows the precise quality of his car, but the buyer cannot distinguish the difference in the quality of a car offered for sale.There is an equal probability of a car being G, B, or U.
-A possible warranty scheme that can ensure incentive compatibility in question 20 is $g, $b, $u

Accepted Answer

A) $50, $45, $5 
B) $45, $15, $0 
C) $45, $35, $0 
D) $50, $5, $0 
E) $25, $12.5, $0 
A) $50, $45, $5 
B) $45, $15, $0 
C) $45, $35, $0 
D) $50, $5, $0 
E) $25, $12.5, $0

Question 17

In a two-players 1 and 2 non-cooperative game, a strategy constitutes a Nash equilibrium when

Accepted Answer

A) holding fixed the strategy of player 2, player 1 is better off choosing other strategies other than his equilibrium strategy 
B) holding fixed the strategy of player 1, player 2 is better off choosing other strategies other than his equilibrium strategy 
C) holding fixed the strategy of player 2, player 1 is better off with his equilibrium strategy than with other strategies 
D) holding fixed the strategy of player 1, player 2 is better off with his equilibrium strategy than with other strategies 
E) both c and d 
A) holding fixed the strategy of player 2, player 1 is better off choosing other strategies other than his equilibrium strategy 
B) holding fixed the strategy of player 1, player 2 is better off choosing other strategies other than his equilibrium strategy 
C) holding fixed the strategy of player 2, player 1 is better off with his equilibrium strategy than with other strategies 
D) holding fixed the strategy of player 1, player 2 is better off with his equilibrium strategy than with other strategies 
E) both c and d

Question 18

Use the following information for questions 
There are three types of cars, the good G, the bad B, and the ugly U.A G car is worth $30, a B car is worth $15, and a U car is worth $0.A buyer cannot distinguish the quality of cars offered for sale, but the seller does.If there is equal probability of a car being G, B, or U,
-Suppose the type G seller offers a warranty of $g and the type B seller offers $b.If the probability of failure is 0.1, 0.5, and 1 for types G, B, and U, respectively, what is the warranty offered by type G and B sellers to ensure incentive compatibility?

Accepted Answer

A) $20, $15 
B) $25, $15 
C) $30, $30 
D) $37.5, $30 
E) $37.5, $37.5 
A) $20, $15 
B) $25, $15 
C) $30, $30 
D) $37.5, $30 
E) $37.5, $37.5

Question 19

A moral hazard problem can exist between

Accepted Answer

A) a firm's shareholders and bondholders who hold riskless debt claim 
B) a firm's shareholders and managers 
C) a bank and a potential borrower who is applying for a loan 
D) all of the above 
E) none of the above 
A) a firm's shareholders and bondholders who hold riskless debt claim 
B) a firm's shareholders and managers 
C) a bank and a potential borrower who is applying for a loan 
D) all of the above 
E) none of the above

Question 20

Adverse selection is a situation where

Accepted Answer

A) a party of a transaction undertakes an unobservable action at the detriment of the second party after contracting takes place 
B) a party of a transaction possesses an unobservable attribute which is unknown to the second party prior to contracting 
C) the informed party must send a costless signal to prevent market break down 
D) both a and c 
E) both b and c 
A) a party of a transaction undertakes an unobservable action at the detriment of the second party after contracting takes place 
B) a party of a transaction possesses an unobservable attribute which is unknown to the second party prior to contracting 
C) the informed party must send a costless signal to prevent market break down 
D) both a and c 
E) both b and c

In order for a signal to be informative,

An incentive compatibility condition is one where

Which of the following statements is are false?

When a market is incomplete,

The efficient market hypothesis implies that

With diversification, an investor can

In problem 4, if the correlation coefficient is -1 and you want to completely eliminate the risk of the portfolio, then you will invest

Which of the following statements is are false about options?

In a market with asymmetric information,

A time-consistent policy is one where

When there is moral hazard between a firm's shareholders and bondholders, the cost of moral hazard is borne by ______in equilibrium.

In a two-players 1 and 2 non-cooperative game, a strategy constitutes a Nash equilibrium when

A moral hazard problem can exist between

Adverse selection is a situation where

The Nature and Variety of Financial Intermediation

The What, How, and Why of Financial Intermediaries

Major Risks Faced by Banks

Interest Rate Risk

Liquidity Risk

Spot Lending and Credit Risk

Further Issues in Bank Lending

Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance

Off-Balance Sheet Banking and Contingent Claims Products

Securitization

The Deposit Contract, Deposit Insurance, and Shadow Banking

Capital Structure

The 200709 Financial Crisis and Other Financial Crises

Objectives of Bank Regulation

Major Milestones in Banking Legislation and Regulatory Reform

The Evolution of Banks and Markets and the Role of Financial Innovation

The Future

Filters

Exam 1: Basic Concepts

In order for a signal to be informative,

An incentive compatibility condition is one where

Which of the following statements is are false?

When a market is incomplete,

The efficient market hypothesis implies that

With diversification, an investor can

In problem 4, if the correlation coefficient is -1 and you want to completely eliminate the risk of the portfolio, then you will invest

Which of the following statements is are false about options?

In a market with asymmetric information,

A time-consistent policy is one where

When there is moral hazard between a firm's shareholders and bondholders, the cost of moral hazard is borne by ______in equilibrium.

In a two-players 1 and 2 non-cooperative game, a strategy constitutes a Nash equilibrium when

A moral hazard problem can exist between

Adverse selection is a situation where

The Nature and Variety of Financial Intermediation

The What, How, and Why of Financial Intermediaries

Major Risks Faced by Banks

Interest Rate Risk

Liquidity Risk

Spot Lending and Credit Risk

Further Issues in Bank Lending

Special Topics in Credit: Syndicated Loans, Loan Sales, and Project Finance

Off-Balance Sheet Banking and Contingent Claims Products

Securitization

The Deposit Contract, Deposit Insurance, and Shadow Banking

Capital Structure

The 200709 Financial Crisis and Other Financial Crises

Objectives of Bank Regulation

Major Milestones in Banking Legislation and Regulatory Reform

The Evolution of Banks and Markets and the Role of Financial Innovation

The Future

Filters