Question 1

In a private placement, a(n)__________ and __________ are sent to prospective investors.

Accepted Answer

A)  offering memorandum, term sheet 
B)  registration statement, term sheet 
C)  registration statement, offering prospectus 
D)  offering memorandum, offering prospectus 
A)  offering memorandum, term sheet 
B)  registration statement, term sheet 
C)  registration statement, offering prospectus 
D)  offering memorandum, offering prospectus

Question 2

In consumer lending, asymmetric information

Accepted Answer

A)  happens only with securitization. 
B)  cannot be dealt with using the same techniques as in business lending. 
C)  can be partly offset using the same techniques as in business lending. 
D)  may be virtually eliminated as a problem by just a collateral requirement. 
A)  happens only with securitization. 
B)  cannot be dealt with using the same techniques as in business lending. 
C)  can be partly offset using the same techniques as in business lending. 
D)  may be virtually eliminated as a problem by just a collateral requirement.

Question 3

A "secured" loan is one

Accepted Answer

A)  with no stated collateral. 
B)  that is pending approval by a bank loan committee. 
C)  which has collateral. 
D)  in which the borrower is delinquent in loan payments but has not formally defaulted on. 
A)  with no stated collateral. 
B)  that is pending approval by a bank loan committee. 
C)  which has collateral. 
D)  in which the borrower is delinquent in loan payments but has not formally defaulted on.

Question 4

When you get a car loan, the lending institution usually sends a check directly to the car dealer. Such a practice

Accepted Answer

A)  helps forestall moral hazard. 
B)  helps forestall adverse selection. 
C)  gives rise to moral hazard. 
D)  gives rise to adverse selection. 
A)  helps forestall moral hazard. 
B)  helps forestall adverse selection. 
C)  gives rise to moral hazard. 
D)  gives rise to adverse selection.

Question 5

Which of the following is NOT a practice that prevents risk-shifting by a borrower?

Accepted Answer

A)  limited-liability ownership 
B)  placing liens on collateral 
C)  personal guarantees 
D)  restrictive covenants 
A)  limited-liability ownership 
B)  placing liens on collateral 
C)  personal guarantees 
D)  restrictive covenants

Question 6

Because loans to small and midsized businesses are rather __________, they have been relatively __________ to securitize.

Accepted Answer

A)  standardized; easy 
B)  standardized; difficult 
C)  not standardized; easy 
D)  not standardized; difficult 
A)  standardized; easy 
B)  standardized; difficult 
C)  not standardized; easy 
D)  not standardized; difficult

Question 7

Because audited financial statements are __________ to prepare, restrictive covenants rarely appear in loan contracts to companies with __________ than $1 million in assets.

Accepted Answer

A)  inexpensive; more 
B)  inexpensive; less 
C)  expensive; more 
D)  expensive; less 
A)  inexpensive; more 
B)  inexpensive; less 
C)  expensive; more 
D)  expensive; less

Question 8

Unlike private placements, publicly-sold securities lack

Accepted Answer

A)  any kind of statement of the financial condition of the borrower. 
B)  a secondary market. 
C)  a definite maturity date. 
D)  restrictive covenants. 
A)  any kind of statement of the financial condition of the borrower. 
B)  a secondary market. 
C)  a definite maturity date. 
D)  restrictive covenants.

Question 9

A risky small business stands the best chance of finding external financing from

Accepted Answer

A)  a commercial finance company. 
B)  a commercial bank. 
C)  an investment bank. 
D)  trade credit. 
A)  a commercial finance company. 
B)  a commercial bank. 
C)  an investment bank. 
D)  trade credit.

Question 10

An important difference between offering prospectus in a public bond issue and the offering memorandum in a private placement is

Accepted Answer

A)  all relevant factual information about the firm and its financing is required in the prospectus but not in the offering memorandum. 
B)  evidence of due diligence is required in the offering memorandum but not in the prospectus. 
C)  the prospectus may not contain any projections about the company's future while an offering memorandum has no such restriction. 
D)  There are no differences between these two documents. 
A)  all relevant factual information about the firm and its financing is required in the prospectus but not in the offering memorandum. 
B)  evidence of due diligence is required in the offering memorandum but not in the prospectus. 
C)  the prospectus may not contain any projections about the company's future while an offering memorandum has no such restriction. 
D)  There are no differences between these two documents.

Question 11

Moral hazard can be a problem in lending since lenders share __________ in the __________ risk.

Accepted Answer

A)  proportionately; upside 
B)  proportionately; downside 
C)  disproportionately; upside 
D)  disproportionately; downside 
A)  proportionately; upside 
B)  proportionately; downside 
C)  disproportionately; upside 
D)  disproportionately; downside

Question 12

Underwriting spreads on equity issues are much __________ than on debt issues because stock prices are so __________ relative to bond prices.

Accepted Answer

A)  smaller; steady 
B)  smaller; volatile 
C)  larger; steady 
D)  larger; volatile 
A)  smaller; steady 
B)  smaller; volatile 
C)  larger; steady 
D)  larger; volatile

Question 13

Private placements avoid

Accepted Answer

A)  restrictive agreements. 
B)  public disclosure of financial information that is required of securities that are registered with the SEC. 
C)  the need for collateral. 
D)  the primary market. 
A)  restrictive agreements. 
B)  public disclosure of financial information that is required of securities that are registered with the SEC. 
C)  the need for collateral. 
D)  the primary market.

Question 14

Commercial paper has a maximum maturity of

Accepted Answer

A)  one day. 
B)  seven days. 
C)  30 days. 
D)  270 days. 
A)  one day. 
B)  seven days. 
C)  30 days. 
D)  270 days.

Question 15

Which of these forms of financing is generally not employed by very large firms?

Accepted Answer

A)  commercial paper 
B)  medium-term notes 
C)  public debt 
D)  mezzanine funds 
A)  commercial paper 
B)  medium-term notes 
C)  public debt 
D)  mezzanine funds

Question 16

A __________ may agree to waive a restrictive covenant, especially if doing so appears to make the loan __________.

Accepted Answer

A)  borrower; no riskier 
B)  borrower; riskier 
C)  lender; no riskier 
D)  lender; riskier 
A)  borrower; no riskier 
B)  borrower; riskier 
C)  lender; no riskier 
D)  lender; riskier

Question 17

Commercial paper has a minimum maturity of

Accepted Answer

A)  one day. 
B)  seven days. 
C)  30 days. 
D)  270 days. 
A)  one day. 
B)  seven days. 
C)  30 days. 
D)  270 days.

Question 18

Only "large" firms are able to sell __________ securities, with __________ yields than the securities the small and mid-size firms can sell.

Accepted Answer

A)  liquid; lower 
B)  liquid; higher 
C)  illiquid; lower 
D)  illiquid; higher 
A)  liquid; lower 
B)  liquid; higher 
C)  illiquid; lower 
D)  illiquid; higher

Question 19

Adverse selection 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 securitization. 
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 securitization. 
D)  before a transaction is consummated.

Question 20

Firms with a continuous need for working capital financing will probably want to have __________ with a bank.

Accepted Answer

A)  credit rationing 
B)  individually negotiated loans 
C)  repurchase agreements 
D)  a line of credit 
A)  credit rationing 
B)  individually negotiated loans 
C)  repurchase agreements 
D)  a line of credit

Exam 14: Understanding Financial Contracts

In a private placement, a(n)__________ and __________ are sent to prospective investors.

In consumer lending, asymmetric information

A "secured" loan is one

When you get a car loan, the lending institution usually sends a check directly to the car dealer. Such a practice

Which of the following is NOT a practice that prevents risk-shifting by a borrower?

Because loans to small and midsized businesses are rather __________, they have been relatively __________ to securitize.

Because audited financial statements are __________ to prepare, restrictive covenants rarely appear in loan contracts to companies with __________ than $1 million in assets.

Unlike private placements, publicly-sold securities lack

A risky small business stands the best chance of finding external financing from

An important difference between offering prospectus in a public bond issue and the offering memorandum in a private placement is

Moral hazard can be a problem in lending since lenders share __________ in the __________ risk.

Underwriting spreads on equity issues are much __________ than on debt issues because stock prices are so __________ relative to bond prices.

Private placements avoid

Commercial paper has a maximum maturity of

Which of these forms of financing is generally not employed by very large firms?

A __________ may agree to waive a restrictive covenant, especially if doing so appears to make the loan __________.

Commercial paper has a minimum maturity of

Only "large" firms are able to sell __________ securities, with __________ yields than the securities the small and mid-size firms can sell.

Adverse selection is, in general, the asymmetric information problem that occurs

Firms with a continuous need for working capital financing will probably want to have __________ with a bank.

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

In a private placement, a(n) and are sent to prospective investors.

Because loans to small and midsized businesses are rather , they have been relatively to securitize.

Because audited financial statements are to prepare, restrictive covenants rarely appear in loan contracts to companies with than $1 million in assets.

Moral hazard can be a problem in lending since lenders share in the risk.

Underwriting spreads on equity issues are much than on debt issues because stock prices are so relative to bond prices.

A may agree to waive a restrictive covenant, especially if doing so appears to make the loan .

Only "large" firms are able to sell securities, with yields than the securities the small and mid-size firms can sell.