Exam 2: An Overview of the Financial System

Adverse selection is a problem associated with equity and debt contracts arising from ________.

Financial institutions that accept deposits and make loans are called ________ institutions.

Risk sharing is profitable for financial institutions due to ________.

Government regulations to reduce the possibility of financial panic include all of the following except ________.

You can borrow $5000 to finance a new business venture.This new venture will generate annual earnings of $251.The maximum interest rate that you would pay on the borrowed funds and still increase your income is ________.

If the maturity of a debt instrument is less than one year,the debt is called ________.

Treasury bills pay no interest but are sold at a ________.That is,you will pay a lower purchase price than the amount you receive at maturity.

Treasury bills are considered the safest of all money market instruments because there is no risk of ________.

When an investment bank ________ securities,it guarantees a price for a corporation's securities and then sells them to the public.

An example of economies of scale in the provision of financial services is ________.

The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.

Which of the following financial intermediaries is not a depository institution?

Which of the following is not a secondary market?

An important feature of money market mutual fund shares is ________.

Because there is an imbalance of information in a lending situation,we must deal with the problems of adverse selection and moral hazard.Define these terms and explain how financial intermediaries can reduce these problems.

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

The process where financial intermediaries create and sell low-risk assets and use the proceeds to purchase riskier assets is known as ________.

Increasing the amount of information available to investors helps to reduce the problems of ________ and ________ in the financial markets.

Typically,borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project.The difference in information is called ________.

Describe the difference between the money market and the capital market.