Question 1

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. A

Question 2

The fact that the credit-rating agencies both advised clients on how to structure the financial instruments that paid out cash flows from subprime mortgages and also rated these financial instruments contributed to the

Accepted Answer

A) subprime financial crisis that began in 2007. 
B) Enron collapse. 
C) demise of Arthur Andersen. 
D) technology bust. 
A) subprime financial crisis that began in 2007. 
B) Enron collapse. 
C) demise of Arthur Andersen. 
D) technology bust. A

Question 3

The concept of adverse selection helps to explain all of the following except

Accepted Answer

A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from the securities markets. 
B) why indirect finance is more important than direct finance as a source of business finance. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why the financial system is so heavily regulated. 
A) why firms are more likely to obtain funds from banks and other financial intermediaries,rather than from the securities markets. 
B) why indirect finance is more important than direct finance as a source of business finance. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) why the financial system is so heavily regulated. C

Question 4

The practice of ________ is allocating initially underpriced initial public offerings to executives in companies the investment bank hopes to do underwriting business with in the future.

Accepted Answer

A) discounting 
B) spinning 
C) peppering 
D) wiring 
A) discounting 
B) spinning 
C) peppering 
D) wiring

Question 5

That most used cars are sold by intermediaries (i.e.,used car dealers)provides evidence that these intermediaries

Accepted Answer

A) have been afforded special government treatment,since used car dealers do not provide information that is valued by consumers of used cars. 
B) are able to prevent potential competitors from free-riding off the information that they provide. 
C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D) have solved the moral hazard problem by providing valuable information to their customers. 
A) have been afforded special government treatment,since used car dealers do not provide information that is valued by consumers of used cars. 
B) are able to prevent potential competitors from free-riding off the information that they provide. 
C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D) have solved the moral hazard problem by providing valuable information to their customers.

Question 6

Explain the principal-agent problem as it pertains to equity contracts.

Accepted Answer

The principals are the stockholders who

Question 7

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

Accepted Answer

A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) 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. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system. 
A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) 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. 
C) Collateral is a prevalent feature of debt contracts for both households and business. 
D) There is very little regulation of the financial system.

Question 8

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Accepted Answer

A) collateral. 
B) points. 
C) interest. 
D) good faith money. 
A) collateral. 
B) points. 
C) interest. 
D) good faith money.

Question 9

A venture capital firm protects its equity investment from moral hazard through which of the following means?

Accepted Answer

A) It places people on the board of directors to better monitor the borrowing firm's activities. 
B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C) It prohibits the borrowing firm from replacing its management. 
D) It requires a 50% stake in the company. 
A) It places people on the board of directors to better monitor the borrowing firm's activities. 
B) It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C) It prohibits the borrowing firm from replacing its management. 
D) It requires a 50% stake in the company.

Question 10

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Accepted Answer

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

Question 11

High net worth helps to diminish the problem of moral hazard problem by

Accepted Answer

A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts. 
A) requiring the state to verify the debt contract. 
B) collateralizing the debt contract. 
C) making the debt contract incentive compatible. 
D) giving the debt contract characteristics of equity contracts.

Question 12

Since they require less monitoring of firms,________ contracts are used more frequently than ________ contracts to raise capital.

Accepted Answer

A) debt; equity 
B) equity; debt 
C) debt; loan 
D) equity; stock 
A) debt; equity 
B) equity; debt 
C) debt; loan 
D) equity; stock

Question 13

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation 
A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation

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

Credit-rating agencies may face a conflict of interest because they

Accepted Answer

A) both advise clients on how to structure debt issues and determine the creditworthiness of the debt issues. 
B) underwrite securities and advise clients on how to structure debt issues. 
C) underwrite securities and determine the creditworthiness of the debt issues. 
D) both advise clients on how to structure debt issues and write restrictive covenants. 
A) both advise clients on how to structure debt issues and determine the creditworthiness of the debt issues. 
B) underwrite securities and advise clients on how to structure debt issues. 
C) underwrite securities and determine the creditworthiness of the debt issues. 
D) both advise clients on how to structure debt issues and write restrictive covenants.

Question 16

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 17

If you default on your auto loan,your car will be repossessed because it has been pledged as ________ for the loan.

Accepted Answer

A) interest 
B) collateral 
C) dividend 
D) commodity 
A) interest 
B) collateral 
C) dividend 
D) commodity

Question 18

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 19

Government regulations require publicly traded firms to provide information,reducing

Accepted Answer

A) transactions costs. 
B) the need for diversification. 
C) the adverse selection problem. 
D) economies of scale. 
A) transactions costs. 
B) the need for diversification. 
C) the adverse selection problem. 
D) economies of scale.

Question 20

One purpose of regulation of financial markets is to

Accepted Answer

A) limit the profits of financial institutions. 
B) increase competition among financial institutions. 
C) promote the provision of information to shareholders,depositors and the public. 
D) guarantee that the maximum rates of interest are paid on deposits. 
A) limit the profits of financial institutions. 
B) increase competition among financial institutions. 
C) promote the provision of information to shareholders,depositors and the public. 
D) guarantee that the maximum rates of interest are paid on deposits.

Exam 8: An Economic Analysis of Financial Structure

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

The fact that the credit-rating agencies both advised clients on how to structure the financial instruments that paid out cash flows from subprime mortgages and also rated these financial instruments contributed to the

The concept of adverse selection helps to explain all of the following except

The practice of ________ is allocating initially underpriced initial public offerings to executives in companies the investment bank hopes to do underwriting business with in the future.

That most used cars are sold by intermediaries (i.e.,used car dealers)provides evidence that these intermediaries

Explain the principal-agent problem as it pertains to equity contracts.

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

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

A venture capital firm protects its equity investment from moral hazard through which of the following means?

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

High net worth helps to diminish the problem of moral hazard problem by

Since they require less monitoring of firms,________ contracts are used more frequently than ________ contracts to raise capital.

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

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

Credit-rating agencies may face a conflict of interest because they

Solutions to the moral hazard problem include

If you default on your auto loan,your car will be repossessed because it has been pledged as ________ for the loan.

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

Government regulations require publicly traded firms to provide information,reducing

One purpose of regulation of financial markets is to

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 and the Subprime Meltdown

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 for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

Since they require less monitoring of firms, contracts are used more frequently than contracts to raise capital.

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