Question 1

Adverse selection ________.

Accepted Answer

A) is a problem of symmetric information 
B) occurs after the transaction 
C) is not important in financial markets 
D) why large firms are more likely to obtain funds from securities markets 
A) is a problem of symmetric information 
B) occurs after the transaction 
C) is not important in financial markets 
D) why large firms are more likely to obtain funds from securities markets

Question 2

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 3

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 4

The recent 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 5

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

Accepted Answer

A) Stocks are a far more important source of finance than are bonds. 
B) Stocks and bonds, combined, supply less than one-half of the external funds. 
C) Financial intermediaries are the least important source of external funds for businesses. 
D) Since 1970, more than half of the new issues of stock have been sold to Canadian households. 
A) Stocks are a far more important source of finance than are bonds. 
B) Stocks and bonds, combined, supply less than one-half of the external funds. 
C) Financial intermediaries are the least important source of external funds for businesses. 
D) Since 1970, more than half of the new issues of stock have been sold to Canadian households.

Question 6

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.

Accepted Answer

A) debt; equity 
B) equity; debt 
C) debt; loan 
D) equity; stock 
A) debt; equity 
B) equity; debt 
C) debt; loan 
D) equity; stock

Question 7

Credit card debt is ________.

Accepted Answer

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

Question 8

Explain the four tools that can help solve the principal-agent problem.

Accepted Answer

These are: production of infor

Question 9

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

Accepted Answer

A) Issuing marketable securities is the primary way that they finance their activities. 
B) Bonds are the least important source of external funds to finance their activities. 
C) Stocks are a relatively unimportant source of finance for their activities. 
D) Selling bonds directly to the Canadian household is a major source of funding for Canadian businesses. 
A) Issuing marketable securities is the primary way that they finance their activities. 
B) Bonds are the least important source of external funds to finance their activities. 
C) Stocks are a relatively unimportant source of finance for their activities. 
D) Selling bonds directly to the Canadian household is a major source of funding for Canadian businesses.

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

Explain the difference between net worth and collateral.

Accepted Answer

Net worth is the difference be

Question 12

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

Accepted Answer

A) expertise 
B) diversification 
C) regulations 
D) equity 
A) expertise 
B) diversification 
C) regulations 
D) equity

Question 13

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a ________.

Accepted Answer

A) collateral-insurance clause 
B) prescription covenant 
C) restrictive covenant 
D) proscription covenant 
A) collateral-insurance clause 
B) prescription covenant 
C) restrictive covenant 
D) proscription covenant

Question 14

Government agencies require that firms that sell securities in public markets adhere to have ________.

Accepted Answer

A) intermediation 
B) nondisclosure 
C) independent audits 
D) collateral 
A) intermediation 
B) nondisclosure 
C) independent audits 
D) collateral

Question 15

The remedies for the adverse selection include all but the following.

Accepted Answer

A) Private production and sale of information 
B) Free-riding 
C) Government regulation 
D) Financial intermediation 
A) Private production and sale of information 
B) Free-riding 
C) Government regulation 
D) Financial intermediation

Question 16

As a source of funds for nonfinancial businesses, bonds are relatively more important than stocks in ________.

Accepted Answer

A) Canada 
B) Germany 
C) Japan 
D) the US 
A) Canada 
B) Germany 
C) Japan 
D) the US

Question 17

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 18

Regulation of the financial system ________.

Accepted Answer

A) occurs only in Canada 
B) protects the jobs of employees of financial institutions 
C) protects the wealth of owners of financial institutions 
D) ensures the stability of the financial system 
A) occurs only in Canada 
B) protects the jobs of employees of financial institutions 
C) protects the wealth of owners of financial institutions 
D) ensures the stability of the financial system

Question 19

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

Accepted Answer

A) collateral 
B) points 
C) interest 
D) good faith money 
A) collateral 
B) points 
C) interest 
D) good faith money

Question 20

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

Exam 8: An Economic Analysis of Financial Structure

Adverse selection ________.

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

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

The recent Enron and Tyco scandals are an example of ________.

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.

Credit card debt is ________.

Explain the four tools that can help solve the principal-agent problem.

Which of the following statements concerning external sources of financing for nonfinancial businesses in Canada is true?

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 ________.

Explain the difference between net worth and collateral.

Financial intermediaries develop ________ in things such as computer technology which allows them to lower transactions costs.

A clause in a debt contract requiring that the borrower purchase insurance against loss of the asset financed with the loan is called a ________.

Government agencies require that firms that sell securities in public markets adhere to have ________.

The remedies for the adverse selection include all but the following.

As a source of funds for nonfinancial businesses, bonds are relatively more important than stocks in ________.

Net worth can perform a similar role to ________.

Regulation of the financial system ________.

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

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

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

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

Financial Crises in Emerging Markets

The ISLM Model

Non-Bank Finance

Filters

Since they require less monitoring of firms, contracts are used more frequently than contracts to raise capital.