Question 1

Which of the following is not one of the eight basic facts 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 businesses. 
D)  New security issues is the most important source of external funds to finance businesses. 
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 businesses. 
D)  New security issues is the most important source of external funds to finance businesses. D

Question 2

(I)The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction.
(II)Financial intermediaries facilitate diversification when an investor has only a small sum to invest.

Accepted Answer

A)  (I) is true; (II) false. 
B)  (I) is false; (II) true. 
C)  Both (I) and (II) are true. 
D)  Both (I) and (II) are false. 
A)  (I) is true; (II) false. 
B)  (I) is false; (II) true. 
C)  Both (I) and (II) are true. 
D)  Both (I) and (II) are false. B

Question 3

American businesses use stock to finance about 10 percent of their external financing.

Accepted Answer

A) True 
 B)False  True

Question 4

China is in an early state of development,with a per capita income that is still less than $10,000,one-fifth of the per capita income in the United States.

Accepted Answer

A) True 
 B)False

Question 5

The problem with monitoring as a tool to solve the ________ problem is that it can be expensive in terms of time and money,as reflected in the name economists give it,costly state verification.

Accepted Answer

A)  principal-agent 
B)  adverse selection 
C)  audit 
D)  regulation 
A)  principal-agent 
B)  adverse selection 
C)  audit 
D)  regulation

Question 6

Of the following sources of external finance for American nonfinancial businesses,the most important is

Accepted Answer

A)  loans from banks. 
B)  stocks. 
C)  bonds and commercial paper. 
D)  nonbank loans. 
A)  loans from banks. 
B)  stocks. 
C)  bonds and commercial paper. 
D)  nonbank loans.

Question 7

The problem of adverse selection helps to explain

Accepted Answer

A)  why banks prefer to make loans secured by collateral. 
B)  why banks have a comparative advantage in raising funds for American businesses. 
C)  why borrowers are willing to offer collateral to secure their promises to repay loans. 
D)  all of the above. 
E)  only A and B of the above. 
A)  why banks prefer to make loans secured by collateral. 
B)  why banks have a comparative advantage in raising funds for American businesses. 
C)  why borrowers are willing to offer collateral to secure their promises to repay loans. 
D)  all of the above. 
E)  only A and B of the above.

Question 8

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets.

Accepted Answer

A) True 
 B)False

Question 9

Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.

Accepted Answer

A) True 
 B)False

Question 10

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

Accepted Answer

SEC. 206. Of Sarbanes Oxley Act

CONFLIC

Question 11

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.

Accepted Answer

A)  low; moral hazard 
B)  low; adverse selection 
C)  high; moral hazard 
D)  high; adverse selection 
A)  low; moral hazard 
B)  low; adverse selection 
C)  high; moral hazard 
D)  high; adverse selection

Question 12

Most legal work in the U.S.involves the writing and enforcement of contracts,not ambulance chasing,criminal law,and frivolous lawsuits.

Accepted Answer

A) True 
 B)False

Question 13

What conflicts of interest can arise in accounting firms?

Accepted Answer

Conflicts of interest in accounting firm

Question 14

If potential revenues from underwriting greatly exceed brokerage commissions,there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.

Accepted Answer

A)  stronger; unbiased 
B)  stronger; favorable 
C)  weaker; unbiased 
D)  weaker; favorable 
A)  stronger; unbiased 
B)  stronger; favorable 
C)  weaker; unbiased 
D)  weaker; favorable

Question 15

If bad credit risks are the ones who most actively seek loans and,therefore,receive them from financial intermediaries,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 16

An advantage of providing multiple financial services within one financial institution is that it

Accepted Answer

A)  lowers information costs. 
B)  develops broader long-term relationships with customers. 
C)  both A and B of the above. 
D)  none of the above. 
A)  lowers information costs. 
B)  develops broader long-term relationships with customers. 
C)  both A and B of the above. 
D)  none of the above.

Question 17

Why should we be concerned about conflicts of interest in the financial services industry?

Accepted Answer

The quest for synergies, the benefit fro

Question 18

Collateralized debt is also called secured debt.

Accepted Answer

A) True 
 B)False

Question 19

Solutions to the moral hazard problem include

Accepted Answer

A)  high net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  all of the above. 
E)  only A and B of the above. 
A)  high net worth. 
B)  monitoring and enforcement of restrictive covenants. 
C)  greater reliance on equity contracts and less on debt contracts. 
D)  all of the above. 
E)  only A and B of the above.

Question 20

The Global Legal Settlement includes what key element?

Accepted Answer

A)  It directly reduces conflicts of interest. 
B)  It provides incentives for investment banks to not exploit conflicts of interest. 
C)  It has measures to improve the quality for information in financial markets. 
D)  All of the above. 
A)  It directly reduces conflicts of interest. 
B)  It provides incentives for investment banks to not exploit conflicts of interest. 
C)  It has measures to improve the quality for information in financial markets. 
D)  All of the above.

Exam 7: Why Do Financial Institutions Exist?

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

(I)The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II)Financial intermediaries facilitate diversification when an investor has only a small sum to invest.

American businesses use stock to finance about 10 percent of their external financing.

China is in an early state of development,with a per capita income that is still less than $10,000,one-fifth of the per capita income in the United States.

The problem with monitoring as a tool to solve the ________ problem is that it can be expensive in terms of time and money,as reflected in the name economists give it,costly state verification.

Of the following sources of external finance for American nonfinancial businesses,the most important is

The problem of adverse selection helps to explain

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets.

Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.

Most legal work in the U.S.involves the writing and enforcement of contracts,not ambulance chasing,criminal law,and frivolous lawsuits.

What conflicts of interest can arise in accounting firms?

If potential revenues from underwriting greatly exceed brokerage commissions,there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.

If bad credit risks are the ones who most actively seek loans and,therefore,receive them from financial intermediaries,then financial intermediaries face the problem of

An advantage of providing multiple financial services within one financial institution is that it

Why should we be concerned about conflicts of interest in the financial services industry?

Collateralized debt is also called secured debt.

Solutions to the moral hazard problem include

The Global Legal Settlement includes what key element?

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be , which gives rise to the problem of .

If potential revenues from underwriting greatly exceed brokerage commissions,there is incentive for investment bank analysts to report information about firms issuing securities.