Question 1

Why does the free-rider problem occur in the debt market?

Accepted Answer

Restrictive covenants can reduce moral h

Question 2

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that ________.

Accepted Answer

A)  borrowers may find loopholes that make the covenants ineffective 
B)  they are inexpensive to monitor and enforce 
C)  too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts 
D)  they reduce the value of the debt contract 
A)  borrowers may find loopholes that make the covenants ineffective 
B)  they are inexpensive to monitor and enforce 
C)  too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts 
D)  they reduce the value of the debt contract

Question 3

The financial system includes all but the following type of institutions.

Accepted Answer

A)  Banks 
B)  Insurance companies 
C)  Mutual funds 
D)  Public relations firms 
A)  Banks 
B)  Insurance companies 
C)  Mutual funds 
D)  Public relations firms

Question 4

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

Accepted Answer

A)  proscriptive covenant 
B)  prescriptive covenant 
C)  restrictive covenant 
D)  constraint-imposed covenant 
A)  proscriptive covenant 
B)  prescriptive covenant 
C)  restrictive covenant 
D)  constraint-imposed covenant

Question 5

Venture capital firms have been important in developing the ________ sector in Canada.

Accepted Answer

A)  financial 
B)  high tech 
C)  oil and gas 
D)  government 
A)  financial 
B)  high tech 
C)  oil and gas 
D)  government

Question 6

Of the following sources of external finance for Canadian nonfinancial businesses, the least important is ________.

Accepted Answer

A)  loans from banks 
B)  stocks 
C)  bonds and commercial paper 
D)  loans from other financial intermediaries 
A)  loans from banks 
B)  stocks 
C)  bonds and commercial paper 
D)  loans from other financial intermediaries

Question 7

A venture capital firm protects its equity investment from moral hazard through which of the following means?

Accepted Answer

A)  It places people on the board of directors to better monitor the borrowing firm's activities. 
B)  It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C)  It prohibits the borrowing firm from replacing its management. 
D)  It requires a 50 percent stake in the company. 
A)  It places people on the board of directors to better monitor the borrowing firm's activities. 
B)  It writes contracts that prohibit the sale of an equity investment to the venture capital firm. 
C)  It prohibits the borrowing firm from replacing its management. 
D)  It requires a 50 percent stake in the company.

Question 8

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is ________.

Accepted Answer

A)  costly state verification 
B)  the free-rider problem 
C)  costly avoidance 
D)  debt intermediation 
A)  costly state verification 
B)  the free-rider problem 
C)  costly avoidance 
D)  debt intermediation

Question 9

That only large, well-established corporations have access to securities markets ________.

Accepted Answer

A)  explains why indirect finance is such an important source of external funds for businesses 
B)  can be explained by the problem of moral hazard 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds 
A)  explains why indirect finance is such an important source of external funds for businesses 
B)  can be explained by the problem of moral hazard 
C)  can be explained by government regulations that prohibit small firms from acquiring funds in securities markets 
D)  explains why newer and smaller corporations rely so heavily on the new issues market for funds

Question 10

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called ________.

Accepted Answer

A)  moral hazard 
B)  asymmetric information 
C)  noncollateralized risk 
D)  adverse selection 
A)  moral hazard 
B)  asymmetric information 
C)  noncollateralized risk 
D)  adverse selection

Question 11

Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do.

Accepted Answer

A)  principals; agents 
B)  principals; principals 
C)  agents; agents 
D)  agents; principals 
A)  principals; agents 
B)  principals; principals 
C)  agents; agents 
D)  agents; principals

Question 12

Which of the following is not a benefit to an individual purchasing a mutual fund?

Accepted Answer

A)  Reduced risk 
B)  Lower transactions costs 
C)  Free-riding 
D)  Diversification 
A)  Reduced risk 
B)  Lower transactions costs 
C)  Free-riding 
D)  Diversification

Question 13

A ________ is a provision that restricts or specifies certain activities that a borrower can engage in.

Accepted Answer

A)  residual claimant 
B)  risk hedge 
C)  restrictive barrier 
D)  restrictive covenant 
A)  residual claimant 
B)  risk hedge 
C)  restrictive barrier 
D)  restrictive covenant

Question 14

Commercial and farm mortgages, in which property is pledged as collateral, account for ________.

Accepted Answer

A)  one-quarter of borrowing by nonfinancial businesses 
B)  one-half of borrowing by nonfinancial businesses 
C)  one-twentieth of borrowing by nonfinancial businesses 
D)  two-thirds of borrowing by nonfinancial businesses 
A)  one-quarter of borrowing by nonfinancial businesses 
B)  one-half of borrowing by nonfinancial businesses 
C)  one-twentieth of borrowing by nonfinancial businesses 
D)  two-thirds of borrowing by nonfinancial businesses

Question 15

Of the sources of external funds for nonfinancial businesses in Canada, corporate bonds and commercial paper account for approximately ________ of the total.

Accepted Answer

A)  5 percent 
B)  10 percent 
C)  15 percent 
D)  50 percent 
A)  5 percent 
B)  10 percent 
C)  15 percent 
D)  50 percent

Question 16

Net worth can perform a similar role to ________.

Accepted Answer

A)  diversification 
B)  collateral 
C)  intermediation 
D)  economies of scale 
A)  diversification 
B)  collateral 
C)  intermediation 
D)  economies of scale

Question 17

The Enron and Tyco scandals are an example of ________.

Accepted Answer

A)  the free-rider problem 
B)  the adverse selection problem 
C)  the principal-agent problem 
D)  the "lemons problem" 
A)  the free-rider problem 
B)  the adverse selection problem 
C)  the principal-agent problem 
D)  the "lemons problem"

Question 18

Collateralized debt is also know as ________.

Accepted Answer

A)  unsecured debt 
B)  secured debt 
C)  unrestricted debt 
D)  promissory debt 
A)  unsecured debt 
B)  secured debt 
C)  unrestricted debt 
D)  promissory debt

Question 19

Equity contracts ________.

Accepted Answer

A)  are claims to a share in the profits and assets of a business 
B)  have the advantage over debt contracts of a lower costly state verification 
C)  are used much more frequently to raise capital than are debt contracts 
D)  are not subject to the moral hazard problem 
A)  are claims to a share in the profits and assets of a business 
B)  have the advantage over debt contracts of a lower costly state verification 
C)  are used much more frequently to raise capital than are debt contracts 
D)  are not subject to the moral hazard problem

Question 20

The concept of adverse selection helps to explain all of the following except ________.

Accepted Answer

A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets 
B)  why indirect finance is more important than direct finance as a source of business finance 
C)  why direct finance is more important than indirect finance as a source of business finance 
D)  why the financial system is so heavily regulated 
A)  why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets 
B)  why indirect finance is more important than direct finance as a source of business finance 
C)  why direct finance is more important than indirect finance as a source of business finance 
D)  why the financial system is so heavily regulated

Exam 8: An Economic Analysis of Financial Structure

Why does the free-rider problem occur in the debt market?

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that ________.

The financial system includes all but the following type of institutions.

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

Venture capital firms have been important in developing the ________ sector in Canada.

Of the following sources of external finance for Canadian nonfinancial businesses, the least important is ________.

A venture capital firm protects its equity investment from moral hazard through which of the following means?

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is ________.

That only large, well-established corporations have access to securities markets ________.

A borrower who takes out a loan usually has better information about the potential returns and risk of the investment projects he plans to undertake than does the lender. This inequality of information is called ________.

Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do.

Which of the following is not a benefit to an individual purchasing a mutual fund?

A ________ is a provision that restricts or specifies certain activities that a borrower can engage in.

Commercial and farm mortgages, in which property is pledged as collateral, account for ________.

Of the sources of external funds for nonfinancial businesses in Canada, corporate bonds and commercial paper account for approximately ________ of the total.

Net worth can perform a similar role to ________.

The Enron and Tyco scandals are an example of ________.

Collateralized debt is also know as ________.

Equity contracts ________.

The concept of adverse selection helps to explain all of the following except ________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

Managers () may act in their own interest rather than in the interest of the stockholder-owners () because the managers have less incentive to maximize profits than the stockholder-owners do.