Exam 8: An Economic Analysis of Financial Structure

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

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

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

The principal-agent problem

Because of the "lemons problem" the price a buyer of a used car pays is

Explain the principal-agent problem as it pertains to equity contracts.

For restrictive covenants to help reduce the moral hazard problem,they must be ________ by the lender.

Adverse selection is a problem associated with equity and debt contracts arising from

Which of the following is NOT one of the eight basic puzzles about financial structure?

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

Although debt contracts require less monitoring than equity contracts,debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.

The reduction in transactions costs per dollar of investment as the size of transactions increases is

Which of the following is NOT one of the eight basic puzzles about financial structure?

Of the following sources of external finance for American nonfinancial businesses,the least important is

Regulation of the financial system

A debt contract is incentive compatible

One reason financial systems in developing and transition countries are underdeveloped is

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding.These clauses are

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