Question 1

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

Accepted Answer

A)  Stocks are the most important source of finance for American businesses. 
B)  Issuing marketable securities is not the primary way businesses finance their operations. 
C)  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. 
D)  Banks are the most important source of external funds to finance businesses. 
A)  Stocks are the most important source of finance for American businesses. 
B)  Issuing marketable securities is not the primary way businesses finance their operations. 
C)  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. 
D)  Banks are the most important source of external funds to finance businesses.

Question 2

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

Accepted Answer

Restrictive covenants can reduce moral h

Question 3

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 4

A problem for equity contracts is a particular type of ________ called the ________ problem.

Accepted Answer

A)  adverse selection; principal-agent 
B)  moral hazard; principal-agent 
C)  adverse selection; free-rider 
D)  moral hazard; free-rider 
A)  adverse selection; principal-agent 
B)  moral hazard; principal-agent 
C)  adverse selection; free-rider 
D)  moral hazard; free-rider

Question 5

Solutions to the moral hazard problem include

Accepted Answer

A)  low net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  greater reliance on debt contracts than financial intermediaries. 
A)  low net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  greater reliance on debt contracts than financial intermediaries.

Question 6

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a

Accepted Answer

A)  proscriptive covenant. 
B)  prescriptive covenant. 
C)  restrictive covenant. 
D)  constraint-imposed covenant. 
A)  proscriptive covenant. 
B)  prescriptive covenant. 
C)  restrictive covenant. 
D)  constraint-imposed covenant.

Question 7

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 8

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 9

Because of the "lemons problem" the price a buyer of a used car pays is

Accepted Answer

A)  equal to the price of a lemon. 
B)  less than the price of a lemon. 
C)  equal to the price of a peach. 
D)  between the price of a lemon and a peach. 
A)  equal to the price of a lemon. 
B)  less than the price of a lemon. 
C)  equal to the price of a peach. 
D)  between the price of a lemon and a peach.

Question 10

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.

Question 11

A key finding of the economic analysis of financial structure is that

Accepted Answer

A)  the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B)  while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. 
C)  given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D)  economists do not have a very good explanation for why securities markets are so heavily regulated. 
A)  the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B)  while free-rider problems limit the extent to which securities markets finance some business activities, nevertheless the majority of funds going to businesses are channeled through securities markets. 
C)  given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D)  economists do not have a very good explanation for why securities markets are so heavily regulated.

Question 12

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 13

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 14

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 15

A debt contract is incentive compatible

Accepted Answer

A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced. 
C)  if the debt contract is treated like an equity. 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires. 
A)  if the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's net worth in the business. 
B)  if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard is significantly reduced. 
C)  if the debt contract is treated like an equity. 
D)  if the lender has the incentive to behave in the way that the borrower expects and desires.

Question 16

Which of the following is not a benefit to an individual purchasing a mutual fund?

Accepted Answer

A)  reduced risk 
B)  lower transactions costs 
C)  free-riding 
D)  diversification 
A)  reduced risk 
B)  lower transactions costs 
C)  free-riding 
D)  diversification

Question 17

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

Accepted Answer

Collateral is property that is promised

Question 18

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding.These clauses are

Accepted Answer

A)  limited-liability clauses. 
B)  risk insurance. 
C)  restrictive covenants. 
D)  illegal. 
A)  limited-liability clauses. 
B)  risk insurance. 
C)  restrictive covenants. 
D)  illegal.

Question 19

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

Accepted Answer

A)  monitored and enforced 
B)  written in all capitals 
C)  easily changed 
D)  impossible to remove 
A)  monitored and enforced 
B)  written in all capitals 
C)  easily changed 
D)  impossible to remove

Question 20

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.

Exam 8: An Economic Analysis of Financial Structure

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

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

Collateralized debt is also know as

A problem for equity contracts is a particular type of ________ called the ________ problem.

Solutions to the moral hazard problem include

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of a

The predominant form of household debt is

The principal-agent problem

Because of the "lemons problem" the price a buyer of a used car pays is

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

A key finding of the economic analysis of financial structure is that

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

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.

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

A debt contract is incentive compatible

Which of the following is not a benefit to an individual purchasing a mutual fund?

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

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding.These clauses are

For restrictive covenants to help reduce the moral hazard problem they must be ________ by the lender.

The free-rider problem occurs because

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

A problem for equity contracts is a particular type of called the problem.

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.