Question 1

Of the sources of external funds for nonfinancial businesses in the United States, bonds account for approximately ________ of the total.

Accepted Answer

A) 10% 
B) 20% 
C) 30% 
D) 50% 
A) 10% 
B) 20% 
C) 30% 
D) 50% C

Question 2

Explain how the "lemons" problem could cause financial markets to fail.

Accepted Answer

not answered

Question 3

Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that

Accepted Answer

A) prevent lenders from foreclosing on borrowers with political clout. 
B) nationalize banks and direct credit to politically favored borrowers. 
C) make it costly to collect payments and collateral from defaulting debtors. 
D) do all of the above. 
E) do only A and B of the above. 
A) prevent lenders from foreclosing on borrowers with political clout. 
B) nationalize banks and direct credit to politically favored borrowers. 
C) make it costly to collect payments and collateral from defaulting debtors. 
D) do all of the above. 
E) do only A and B of the above. D

Question 4

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) do all of the above. 
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) do all of the above.

Question 5

What conflicts of interest can arise in credit-rating agencies?

Accepted Answer

The answer of What conflicts of interest can arise in...

Question 6

Net worth

Accepted Answer

A) is the difference between current assets and current liabilities. 
B) is the difference between assets and liabilities. 
C) is total assets divided by total liabilities. 
D) is total assets plus total liabilities. 
A) is the difference between current assets and current liabilities. 
B) is the difference between assets and liabilities. 
C) is total assets divided by total liabilities. 
D) is total assets plus total liabilities.

Question 7

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

Accepted Answer

A) a restrictive covenant. 
B) a collusive agreement between mortgage lenders and insurance companies. 
C) both A and B of the above. 
D) neither A nor B of the above. 
A) a restrictive covenant. 
B) a collusive agreement between mortgage lenders and insurance companies. 
C) both A and B of the above. 
D) neither A nor B of the above.

Question 8

A debt contract is more likely to be incentive compatible if

Accepted Answer

A) the company must follow standard accounting principles. 
B) the funds are provided by a venture capital firm. 
C) owners of the firm have more of their own money in the business. 
D) all of the above. 
E) only B and C. 
A) the company must follow standard accounting principles. 
B) the funds are provided by a venture capital firm. 
C) owners of the firm have more of their own money in the business. 
D) all of the above. 
E) only B and C.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

Accepted Answer

A) True 
 B)False

Question 11

Because information is scarce,

Accepted Answer

A) equity contracts are used much more frequently to raise capital than are debt contracts. 
B) monitoring managers gives rise to costly state verification. 
C) government regulations, such as standard accounting principles, can help reduce moral hazard. 
D) all of the above are true. 
E) only B and C of the above are true. 
A) equity contracts are used much more frequently to raise capital than are debt contracts. 
B) monitoring managers gives rise to costly state verification. 
C) government regulations, such as standard accounting principles, can help reduce moral hazard. 
D) all of the above are true. 
E) only B and C of the above are true.

Question 12

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

Accepted Answer

A) Direct finance is used in less than 5% of the external financing of American businesses. 
B) Only large, well-established corporations have access to securities markets to finance their activities. 
C) Loans from banks and other financial intermediaries in the United States provide five times more financing of corporate activities than do stock markets. 
D) All of the above. 
E) Only A and B of the above. 
A) Direct finance is used in less than 5% of the external financing of American businesses. 
B) Only large, well-established corporations have access to securities markets to finance their activities. 
C) Loans from banks and other financial intermediaries in the United States provide five times more financing of corporate activities than do stock markets. 
D) All of the above. 
E) Only A and B of the above.

Question 13

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

Accepted Answer

A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. 
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households. 
C) The stock market accounted for the largest share of the financing of American businesses in the 1970-2000 period. 
D) All of the above. 
E) Only A and B of the above. 
A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. 
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households. 
C) The stock market accounted for the largest share of the financing of American businesses in the 1970-2000 period. 
D) All of the above. 
E) Only A and B of the above.

Question 14

Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets?

Accepted Answer

A) requiring a firm's chief officers to certify its financial statements and other disclosures 
B) requiring investment banks to make their analysts' recommendations public 
C) requiring disclosure of off-balance-sheet transactions 
D) increasing resources available to the Securities and Exchange Commission to supervise financial markets 
A) requiring a firm's chief officers to certify its financial statements and other disclosures 
B) requiring investment banks to make their analysts' recommendations public 
C) requiring disclosure of off-balance-sheet transactions 
D) increasing resources available to the Securities and Exchange Commission to supervise financial markets

Question 15

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 16

The free-rider problem

Accepted Answer

A) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
B) suggests that the private sale of information will only be a partial solution to the lemons problem. 
C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection. 
D) all of the above. 
A) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
B) suggests that the private sale of information will only be a partial solution to the lemons problem. 
C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection. 
D) all of the above.

Question 17

Issuing marketable securities is the primary way businesses finance their operations.

Accepted Answer

A) True 
 B)False

Question 18

In the United States, the government agency requiring that firms, which sell securities in public markets, adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Accepted Answer

A) Federal Corporate Securities Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) U)S. Treasury Department. 
E) Federal Reserve System. 
A) Federal Corporate Securities Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) U)S. Treasury Department. 
E) Federal Reserve System.

Question 19

Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate.

Accepted Answer

A) True 
 B)False

Question 20

Adverse selection

Accepted Answer

A)  is a problem created by asymmetrical information after the transaction. 
B) can be solved by eliminating asymmetrical information. 
C) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
D) all of the above. 
A)  is a problem created by asymmetrical information after the transaction. 
B) can be solved by eliminating asymmetrical information. 
C) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
D) all of the above.

Exam 7: Why Do Financial Institutions Exist

Of the sources of external funds for nonfinancial businesses in the United States, bonds account for approximately ________ of the total.

Explain how the "lemons" problem could cause financial markets to fail.

Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that

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

What conflicts of interest can arise in credit-rating agencies?

Net worth

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

A debt contract is more likely to be incentive compatible if

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

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

Because information is scarce,

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?

Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets?

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

The free-rider problem

Issuing marketable securities is the primary way businesses finance their operations.

In the United States, the government agency requiring that firms, which sell securities in public markets, adhere to standard accounting principles and disclose information about their sales, assets, and earnings is the

Due to criticisms of rating agencies following the default of many subprime products, the SEC prohibited credit rating agencies from structuring the same products that they rate.

Adverse selection

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 Why Are They so Damaging to the Economy

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

Savings Associations and Credit Unions

Finance Companies

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