Question 1

Restrictive covenants

Accepted Answer

A)  generally require that firms use debt finance rather than equity finance. 
B)  generally require that firms use equity finance rather than debt finance. 
C)  put restrictions on the use of borrowed funds. 
D)  were outlawed under the Civil Rights Act of 1964. 
A)  generally require that firms use debt finance rather than equity finance. 
B)  generally require that firms use equity finance rather than debt finance. 
C)  put restrictions on the use of borrowed funds. 
D)  were outlawed under the Civil Rights Act of 1964. C

Question 2

How does the use of collateral and net worth help reduce the problem of adverse selection?

Accepted Answer

To make it more costly for firms to take advantage of their asymmetric information,lenders often require borrowers to pledge some of their assets as collateral,which the lender claims if the borrower defaults.When the firm's net worth is high,the firm's managers have more to lose by using borrowed money for high-risk investments.

Question 3

Small savers face

Accepted Answer

A)  high transactions costs in financial markets. 
B)  low transactions costs in financial markets. 
C)  high transactions costs in financial intermediaries. 
D)  high information costs in financial intermediaries. 
A)  high transactions costs in financial markets. 
B)  low transactions costs in financial markets. 
C)  high transactions costs in financial intermediaries. 
D)  high information costs in financial intermediaries. A

Question 4

All of the following are consequences of adverse selection on good firms EXCEPT

Accepted Answer

A)  the cost of external financing increases. 
B)  firms need to rely more on internal funds. 
C)  firms need to rely more on accumulated profits. 
D)  firms will only be able to attain financing from the government. 
A)  the cost of external financing increases. 
B)  firms need to rely more on internal funds. 
C)  firms need to rely more on accumulated profits. 
D)  firms will only be able to attain financing from the government.

Question 5

How does adverse selection affect the willingness of corporations to issue stock?

Accepted Answer

Since adverse selection reduce

Question 6

Transactions costs are

Accepted Answer

A)  zero in financial markets. 
B)  zero in financial intermediaries. 
C)  the costs of direct financial transactions. 
D)  equal to the taxes imposed on financial transactions. 
A)  zero in financial markets. 
B)  zero in financial intermediaries. 
C)  the costs of direct financial transactions. 
D)  equal to the taxes imposed on financial transactions.

Question 7

How does the principal-agent problem increase the possibility of moral hazard?

Accepted Answer

The shareholders,as owners of the firm,a

Question 8

Financial intermediaries emerged

Accepted Answer

A)  to make loans to governments. 
B)  to provide a market for municipal bonds. 
C)  to reduce transactions costs for small savers and borrowers. 
D)  to reduce transactions costs for traders in stocks and bonds. 
A)  to make loans to governments. 
B)  to provide a market for municipal bonds. 
C)  to reduce transactions costs for small savers and borrowers. 
D)  to reduce transactions costs for traders in stocks and bonds.

Question 9

Why is adverse selection more likely in financial markets when interest rates rise?

Accepted Answer

A)  The remaining borrowers are more likely to be risky. 
B)  Higher interest rates are likely to hurt the economy. 
C)  If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended. 
D)  Banks eliminate risky borrowers by raising interest rates. 
A)  The remaining borrowers are more likely to be risky. 
B)  Higher interest rates are likely to hurt the economy. 
C)  If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended. 
D)  Banks eliminate risky borrowers by raising interest rates.

Question 10

In the late 2000s,which of the following was the primary source of external financing for small to medium-size firms?

Accepted Answer

A)  mortgages 
B)  bank loans other than mortgages 
C)  trade credit 
D)  other loans 
A)  mortgages 
B)  bank loans other than mortgages 
C)  trade credit 
D)  other loans

Question 11

The assumption of asymmetric information means that

Accepted Answer

A)  borrowers and lenders have the same information. 
B)  borrowers and lenders have perfect information. 
C)  borrowers know more than lenders. 
D)  lenders know more than borrowers. 
A)  borrowers and lenders have the same information. 
B)  borrowers and lenders have perfect information. 
C)  borrowers know more than lenders. 
D)  lenders know more than borrowers.

Question 12

The free-rider problem faced by private information-collection firms results in their

Accepted Answer

A)  usually going out of business within a few years. 
B)  collecting less than all the available information about the firms they investigate. 
C)  being plagued by lawsuits. 
D)  charging fees higher than can be justified by market conditions. 
A)  usually going out of business within a few years. 
B)  collecting less than all the available information about the firms they investigate. 
C)  being plagued by lawsuits. 
D)  charging fees higher than can be justified by market conditions.

Question 13

Financial intermediaries are able to act as delegated monitors for individual savers because

Accepted Answer

A)  other investors are unable to gain a free ride on their monitoring efforts. 
B)  borrowers consider this role to be traditional for financial intermediaries and are willing to put up with it. 
C)  the federal government has granted them waivers from laws protecting privacy. 
D)  they employ a vast network of private detectives to carry out their monitoring role. 
A)  other investors are unable to gain a free ride on their monitoring efforts. 
B)  borrowers consider this role to be traditional for financial intermediaries and are willing to put up with it. 
C)  the federal government has granted them waivers from laws protecting privacy. 
D)  they employ a vast network of private detectives to carry out their monitoring role.

Question 14

Moral hazard arises from

Accepted Answer

A)  the difficulty of distinguishing good-risk borrowers from bad-risk borrowers. 
B)  the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers. 
C)  savers' difficulties in monitoring borrowers. 
D)  borrowers' difficulties in locating savers. 
A)  the difficulty of distinguishing good-risk borrowers from bad-risk borrowers. 
B)  the likelihood that bad-risk borrowers are more likely to accept a loan than are good-risk borrowers. 
C)  savers' difficulties in monitoring borrowers. 
D)  borrowers' difficulties in locating savers.

Question 15

When managers do not own very much of the net worth of the firm,then

Accepted Answer

A)  there may be a principal-agent problem. 
B)  the firm will usually have to raise most of its funds in financial markets. 
C)  the firm will have to rely more on equity financing than debt financing. 
D)  the firm will have to rely more on debt financing than equity financing. 
A)  there may be a principal-agent problem. 
B)  the firm will usually have to raise most of its funds in financial markets. 
C)  the firm will have to rely more on equity financing than debt financing. 
D)  the firm will have to rely more on debt financing than equity financing.

Question 16

How is the lemons problem in the used car market an example of asymmetric information?

Accepted Answer

The seller of a used car has m

Question 17

Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

Accepted Answer

A)  The Securities and Exchange Commission 
B)  The Federal Trade Commission 
C)  The National Accounting Board 
D)  The Fair Reporting Commission 
A)  The Securities and Exchange Commission 
B)  The Federal Trade Commission 
C)  The National Accounting Board 
D)  The Fair Reporting Commission

Question 18

Financial intermediaries reduce transactions costs by

Accepted Answer

A)  charging fees to small savers. 
B)  charging fees to small investors. 
C)  taking advantage of economies of scale. 
D)  avoiding risky investments. 
A)  charging fees to small savers. 
B)  charging fees to small investors. 
C)  taking advantage of economies of scale. 
D)  avoiding risky investments.

Question 19

In the late 2000s,the primary source of external funds for corporations was

Accepted Answer

A)  commercial paper. 
B)  loans. 
C)  bonds. 
D)  stocks. 
A)  commercial paper. 
B)  loans. 
C)  bonds. 
D)  stocks.

Question 20

One method that lenders use to mitigate the adverse selection problem is to

Accepted Answer

A)  charge higher interest rates to less creditworthy borrowers. 
B)  monitor closely the behavior of borrowers after a loan is made. 
C)  ration credit. 
D)  provide default insurance. 
A)  charge higher interest rates to less creditworthy borrowers. 
B)  monitor closely the behavior of borrowers after a loan is made. 
C)  ration credit. 
D)  provide default insurance.

Restrictive covenants

How does the use of collateral and net worth help reduce the problem of adverse selection?

Small savers face

All of the following are consequences of adverse selection on good firms EXCEPT

How does adverse selection affect the willingness of corporations to issue stock?

Transactions costs are

How does the principal-agent problem increase the possibility of moral hazard?

Financial intermediaries emerged

Why is adverse selection more likely in financial markets when interest rates rise?

In the late 2000s,which of the following was the primary source of external financing for small to medium-size firms?

The assumption of asymmetric information means that

The free-rider problem faced by private information-collection firms results in their

Financial intermediaries are able to act as delegated monitors for individual savers because

Moral hazard arises from

When managers do not own very much of the net worth of the firm,then

How is the lemons problem in the used car market an example of asymmetric information?

Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

Financial intermediaries reduce transactions costs by

In the late 2000s,the primary source of external funds for corporations was

One method that lenders use to mitigate the adverse selection problem is to

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters

Exam 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System

Restrictive covenants

How does the use of collateral and net worth help reduce the problem of adverse selection?

Small savers face

All of the following are consequences of adverse selection on good firms EXCEPT

How does adverse selection affect the willingness of corporations to issue stock?

Transactions costs are

How does the principal-agent problem increase the possibility of moral hazard?

Financial intermediaries emerged

Why is adverse selection more likely in financial markets when interest rates rise?

In the late 2000s,which of the following was the primary source of external financing for small to medium-size firms?

The assumption of asymmetric information means that

The free-rider problem faced by private information-collection firms results in their

Financial intermediaries are able to act as delegated monitors for individual savers because

Moral hazard arises from

When managers do not own very much of the net worth of the firm,then

How is the lemons problem in the used car market an example of asymmetric information?

Which of the following agencies has established standardized accounting principles for reporting corporate earnings?

Financial intermediaries reduce transactions costs by

In the late 2000s,the primary source of external funds for corporations was

One method that lenders use to mitigate the adverse selection problem is to

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters