Question 1

Transactions costs are

Accepted Answer

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

Question 2

Which of the following firms is most likely to suffer from principal-agent problems?

Accepted Answer

A) A young firm in a growth industry 
B) A mature firm with few growth opportunities 
C) A mature firm with few growth opportunities and which is controlled by its management 
D) A mature firm with few growth opportunities and which, though being controlled by its managers, has highly concentrated stock ownership

Question 3

The presence of transactions costs and information costs

Accepted Answer

A) lowers the cost of funds to borrowers. 
B) raises the expected return to lenders. 
C) lowers the expected return to lenders. 
D) increases the efficiency of the financial system.

Question 4

In the United States the stake of top management in firms' ownership usually is

Accepted Answer

A) less than 5%. 
B) more than 25%. 
C) more than 50%. 
D) more than 75%.

Question 5

One reaction of firms to the adverse selection problem is to

Accepted Answer

A) rely on internal funds to finance investment. 
B) use the stock market rather than the bond market to raise funds. 
C) use the bond market rather than the stock market to raise funds. 
D) borrow long-term rather than short-term.

Question 6

If the market values of commercial buildings in a city begin to decline rapidly, what is likely to happen to the number of claims for fire insurance filed by the owners of these buildings?

Accepted Answer

The answer of If the market values of commercial buildings...

Question 7

The "lemons problem" is overcome in the used car market by

Accepted Answer

A) strict government regulation of private deals between individual buyers and sellers of used cars. 
B) most used cars selling for well below their true values. 
C) "lemon insurance" policies being offered by insurance companies. 
D) the existence of used car dealers who are concerned about maintaining their reputations.

Question 8

The company that manufactures Screaming Chocolate Zonkers breakfast cereal finds that its sales collapse, it is forced into bankruptcy, and it defaults on its bonds, as a result of an unexpectedly harsh report from the Surgeon General condemning excessive chocolate eating by children. This incident is best thought of as an example of

Accepted Answer

A) symmetric information in the financial markets. 
B) asymmetric information in the financial markets. 
C) lack of perfect information in the financial markets. 
D) moral hazard in the financial markets.

Question 9

Requirements for information disclosure for firms that desire to sell securities in financial markets

Accepted Answer

A) are very common in industrialized countries, including the United States. 
B) are common in other industrialized countries, but have not yet been adopted in the United States. 
C) have been adopted in the United States, but have not yet been adopted in other industrialized countries. 
D) have yet to be adopted in the United States or other industrialized countries.

Question 10

To help offset the costs from loan defaults, the First National Bank of Gotham decides to increase the interest rate it charges on its business loans. As a result of this increase in the interest rate, the creditworthiness of Gotham's loan applicants is likely to

Accepted Answer

A) improve. 
B) deteriorate. 
C) be unchanged. 
D) be unchanged, unless the economy enters a recession at the same time as the interest rate is increased.

Question 11

The assumption of symmetric 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.

Question 12

Private information-collection firms fail to eliminate the adverse selection problem because

Accepted Answer

A) the law does not allow them to disclose private information about the creditworthiness of firms. 
B) they do not monitor borrowers after loans have been made. 
C) some investors who do not pay for their services will still profit from them. 
D) most companies refuse to provide them with any information.

Question 13

It is generally agreed that

Accepted Answer

A) the financial system would be more efficient if intermediaries were eliminated. 
B) the economy benefits from the growth generated by intermediaries. 
C) the addition of intermediaries adds to transactions costs. 
D) intermediaries should not seek to profit from reducing transactions costs.

Question 14

Banks deal with problems of adverse selection by

Accepted Answer

A) charging high interest rates. 
B) gathering information about the default risk of borrowers. 
C) making only short-term loans. 
D) making only long-term loans.

Question 15

Critics of the Sarbanes-Oxley Act cite all of the following EXCEPT

Accepted Answer

A) existing laws could have been enforced to punish fraud. 
B) it fails to address the need to provide incentives for institutional investors. 
C) it is likely to reduce the liquidity of financial markets. 
D) the costs of Sarbanes-Oxley exceed its benefits.

Question 16

A firm's principals are its

Accepted Answer

A) shareholders. 
B) management. 
C) values. 
D) customers.

Question 17

Banks earn a profit by

Accepted Answer

A) charging savers and borrowers fees for reducing transactions costs. 
B) holding large equity positions in major corporations. 
C) holding large equity positions in small firms. 
D) publishing ratings of corporate bonds.

Question 18

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.

Question 19

Why do you believe that the SEC would have mandated under Regulation Fair Disclosure that companies release material information to the general public at the same time it is issued to Wall Street professionals?

Accepted Answer

The answer of Why do you believe that the SEC...

Question 20

Banks require collateral for loans in order to

Accepted Answer

A) ensure that borrowers have significant amounts of their own funds invested in their businesses. 
B) charge higher interest rates on loans. 
C) reduce their tax liability on the interest they collect on loans. 
D) reduce the total amount they are obliged to lend to any one borrower.

Exam 11: Reducing Transactions Costs and Information Costs