Question 1

The putting up of outside collateral is

Accepted Answer

A)  one form of the moral hazard problem. 
B)  one form of the adverse selection problem. 
C)  a signal of a high-quality borrower. 
D)  a signal of a low-quality borrower. 
A)  one form of the moral hazard problem. 
B)  one form of the adverse selection problem. 
C)  a signal of a high-quality borrower. 
D)  a signal of a low-quality borrower. C

Question 2

A borrower's willingness to sign a personal guarantee is

Accepted Answer

A)  one form of the moral hazard problem. 
B)  one form of the adverse selection problem. 
C)  a signal of a high-quality borrower. 
D)  a signal of a low-quality borrower. 
A)  one form of the moral hazard problem. 
B)  one form of the adverse selection problem. 
C)  a signal of a high-quality borrower. 
D)  a signal of a low-quality borrower. C

Question 3

A bank that maintains high NSF fees might also have relatively __________ loan rates, both part of a strategy to attract __________-than-average borrowers.

Accepted Answer

A)  low; safer 
B)  low; riskier 
C)  high; safer 
D)  high; riskier 
A)  low; safer 
B)  low; riskier 
C)  high; safer 
D)  high; riskier A

Question 4

A "registration statement" is drawn up in the process of

Accepted Answer

A)  preparing a private placement. 
B)  requesting the waiving of a restrictive covenant. 
C)  underwriting publicly-sold securities. 
D)  listing the collateral on a loan. 
A)  preparing a private placement. 
B)  requesting the waiving of a restrictive covenant. 
C)  underwriting publicly-sold securities. 
D)  listing the collateral on a loan.

Question 5

The majority of small businesses

Accepted Answer

A)  are privately owned. 
B)  are managed by professional managers. 
C)  raise funds in financial markets. 
D)  are self-financing. 
A)  are privately owned. 
B)  are managed by professional managers. 
C)  raise funds in financial markets. 
D)  are self-financing.

Question 6

Which type of financing requires the largest minimum size of the borrower?

Accepted Answer

A)  mezzanine funds 
B)  public debt 
C)  venture capital funds 
D)  public equity 
A)  mezzanine funds 
B)  public debt 
C)  venture capital funds 
D)  public equity

Question 7

Asymmetric information is a particular problem for __________ firms or firms with __________ relationship with a particular lending institution.

Accepted Answer

A)  small; a longstanding 
B)  small; only a recent 
C)  large; a longstanding 
D)  large; only a recent 
A)  small; a longstanding 
B)  small; only a recent 
C)  large; a longstanding 
D)  large; only a recent

Question 8

Moral hazard is, in general, the asymmetric information problem that occurs

Accepted Answer

A)  after a transaction is consummated. 
B)  due to a size difference in the parties to a transaction. 
C)  with equity financing. 
D)  before a transaction is consummated. 
A)  after a transaction is consummated. 
B)  due to a size difference in the parties to a transaction. 
C)  with equity financing. 
D)  before a transaction is consummated.

Question 9

The textbook defines any business with less than __________ in assets to be "small."

Accepted Answer

A)  $100,000,000 
B)  $10,000,000 
C)  $1,000,000 
D)  $500,000 
A)  $100,000,000 
B)  $10,000,000 
C)  $1,000,000 
D)  $500,000

Question 10

The U.S. financial system is a(n)__________ system.

Accepted Answer

A)  markets-oriented 
B)  angel financing 
C)  banking-oriented 
D)  loan committee 
A)  markets-oriented 
B)  angel financing 
C)  banking-oriented 
D)  loan committee

Question 11

Insurance companies

Accepted Answer

A)  are the major buyers of private placements for their own portfolio of assets. 
B)  help firms sell private placements. 
C)  sell their own private placements. 
D)  have nothing to do with private placements. 
A)  are the major buyers of private placements for their own portfolio of assets. 
B)  help firms sell private placements. 
C)  sell their own private placements. 
D)  have nothing to do with private placements.

Question 12

Bankers have an advantage in developing a relationship with their business borrowers because

Accepted Answer

A)  banks provide a menu of services which allows them to learn about a company. 
B)  banks have access to higher quality credit reports. 
C)  banks are better at getting owners to pledge collateral than are other lenders. 
D)  loans to small businesses are usually less than 5 years thus allowing encouraging borrowers to return more frequently for evaluation. 
A)  banks provide a menu of services which allows them to learn about a company. 
B)  banks have access to higher quality credit reports. 
C)  banks are better at getting owners to pledge collateral than are other lenders. 
D)  loans to small businesses are usually less than 5 years thus allowing encouraging borrowers to return more frequently for evaluation.

Question 13

The possibility that a borrower will break a promise made to the lender after the loan is made is one form of

Accepted Answer

A)  the moral hazard problem. 
B)  the adverse selection problem. 
C)  outside collateral. 
D)  inside collateral. 
A)  the moral hazard problem. 
B)  the adverse selection problem. 
C)  outside collateral. 
D)  inside collateral.

Question 14

Minimizing per-dollar distribution costs favors issuing bonds __________ for issue sizes above approximately __________.

Accepted Answer

A)  privately; $10,000,000 
B)  privately; $100,000,000 
C)  publicly; $10,000,000 
D)  publicly; $100,000,000 
A)  privately; $10,000,000 
B)  privately; $100,000,000 
C)  publicly; $10,000,000 
D)  publicly; $100,000,000

Question 15

Large companies with good credit ratings tend to rely on __________ for short-term financing.

Accepted Answer

A)  the commercial paper market 
B)  private placements 
C)  finance companies 
D)  equity 
A)  the commercial paper market 
B)  private placements 
C)  finance companies 
D)  equity

Question 16

What is the "underwriting spread?"

Accepted Answer

A)  the average percentage of the total bond issue handled by a member of an underwriting syndicate 
B)  the difference between the price the underwriters receive and the price they pay the borrower 
C)  the length of time the underwriter agrees to withhold the bonds from the primary market 
D)  the number of financial institutions in the underwriting syndicate 
A)  the average percentage of the total bond issue handled by a member of an underwriting syndicate 
B)  the difference between the price the underwriters receive and the price they pay the borrower 
C)  the length of time the underwriter agrees to withhold the bonds from the primary market 
D)  the number of financial institutions in the underwriting syndicate

Question 17

The textbook defines a "large" business as having assets in excess of

Accepted Answer

A)  $50 million. 
B)  $150 million. 
C)  $500 million. 
D)  $1 billion. 
A)  $50 million. 
B)  $150 million. 
C)  $500 million. 
D)  $1 billion.

Question 18

Private placements are a particularly important type of financing for __________ firms.

Accepted Answer

A)  very small 
B)  small 
C)  mid-size 
D)  large 
A)  very small 
B)  small 
C)  mid-size 
D)  large

Question 19

The Federal Reserve considers any business with less than __________ employees to be "small."

Accepted Answer

A)  10 
B)  100 
C)  500 
D)  1500 
A)  10 
B)  100 
C)  500 
D)  1500

Question 20

The various signaling techniques __________ completely overcome the moral hazard problem in the case of the small borrower, so that small business loans are generally __________-term.

Accepted Answer

A)  can; long 
B)  can; short 
C)  cannot; long 
D)  cannot; short 
A)  can; long 
B)  can; short 
C)  cannot; long 
D)  cannot; short

Exam 14: Understanding Financial Contracts

The putting up of outside collateral is

A borrower's willingness to sign a personal guarantee is

A bank that maintains high NSF fees might also have relatively __________ loan rates, both part of a strategy to attract __________-than-average borrowers.

A "registration statement" is drawn up in the process of

The majority of small businesses

Which type of financing requires the largest minimum size of the borrower?

Asymmetric information is a particular problem for __________ firms or firms with __________ relationship with a particular lending institution.

Moral hazard is, in general, the asymmetric information problem that occurs

The textbook defines any business with less than __________ in assets to be "small."

The U.S. financial system is a(n)__________ system.

Insurance companies

Bankers have an advantage in developing a relationship with their business borrowers because

The possibility that a borrower will break a promise made to the lender after the loan is made is one form of

Minimizing per-dollar distribution costs favors issuing bonds __________ for issue sizes above approximately __________.

Large companies with good credit ratings tend to rely on __________ for short-term financing.

What is the "underwriting spread?"

The textbook defines a "large" business as having assets in excess of

Private placements are a particularly important type of financing for __________ firms.

The Federal Reserve considers any business with less than __________ employees to be "small."

The various signaling techniques __________ completely overcome the moral hazard problem in the case of the small borrower, so that small business loans are generally __________-term.

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Demystifying Derivatives

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

A bank that maintains high NSF fees might also have relatively loan rates, both part of a strategy to attract -than-average borrowers.

Asymmetric information is a particular problem for firms or firms with relationship with a particular lending institution.

Minimizing per-dollar distribution costs favors issuing bonds for issue sizes above approximately .

The various signaling techniques completely overcome the moral hazard problem in the case of the small borrower, so that small business loans are generally -term.