Question 1

A lesson of the Enron collapse is that government regulation ________.

Accepted Answer

A) always fails 
B) can reduce but not eliminate asymmetric information 
C) increases the problem of asymmetric information 
D) should be reduced 
A) always fails 
B) can reduce but not eliminate asymmetric information 
C) increases the problem of asymmetric information 
D) should be reduced

Question 2

The "lemons problem" exists because of ________.

Accepted Answer

A) transactions costs 
B) economies of scale 
C) rational expectations 
D) asymmetric information 
A) transactions costs 
B) economies of scale 
C) rational expectations 
D) asymmetric information

Question 3

Because of the adverse selection problem, ________.

Accepted Answer

A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks 
B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town" 
C) lenders are reluctant to make loans that are not secured by collateral 
D) lenders will write debt contracts that restrict certain activities of borrowers 
A) good credit risks are more likely to seek loans causing lenders to make a disproportionate amount of loans to good credit risks 
B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity to "skip town" 
C) lenders are reluctant to make loans that are not secured by collateral 
D) lenders will write debt contracts that restrict certain activities of borrowers

Question 4

Canadian businesses used stocks for external financing ________ percent over the 1970-2002 period.

Accepted Answer

A) 2 
B) 12 
C) 22 
D) 0)2 
A) 2 
B) 12 
C) 22 
D) 0)2

Question 5

Which of the following is NOT one of the four types of restrictive covenants?

Accepted Answer

A) Convenants to discourage undesirable behaviour 
B) Convenants to encourage desirable behaviour 
C) Covenants to keep collateral valuable 
D) Covenants for incentive compatibility 
A) Convenants to discourage undesirable behaviour 
B) Convenants to encourage desirable behaviour 
C) Covenants to keep collateral valuable 
D) Covenants for incentive compatibility

Question 6

If all the students in your class pool their money in order to buy one bond and share its return accordingly, in order to eliminate transaction costs, this is an example of ________.

Accepted Answer

A) economies of scale 
B) cooperative game 
C) risk sharing 
D) moral hazard 
A) economies of scale 
B) cooperative game 
C) risk sharing 
D) moral hazard

Question 7

The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

Accepted Answer

A) uneven 
B) parallel 
C) principal 
D) agency 
A) uneven 
B) parallel 
C) principal 
D) agency

Question 8

A problem for equity contracts is a particular type of ________ called the ________ problem.

Accepted Answer

A) adverse selection; principal-agent 
B) moral hazard; principal-agent 
C) adverse selection; free-rider 
D) moral hazard; free-rider 
A) adverse selection; principal-agent 
B) moral hazard; principal-agent 
C) adverse selection; free-rider 
D) moral hazard; free-rider

Question 9

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

Accepted Answer

A) discounting 
B) economies of scale 
C) economies of trade 
D) diversification 
A) discounting 
B) economies of scale 
C) economies of trade 
D) diversification

Question 10

The principal-agent problem ________.

Accepted Answer

A) occurs when managers have more incentive to maximize profits than the stockholders-owners do 
B) in financial markets helps to explain why equity is a relatively important source of finance for Canadian business 
C) would not arise if the owners of the firm had complete information about the activities of the managers 
D) explains why direct finance is more important than indirect finance as a source of business finance 
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do 
B) in financial markets helps to explain why equity is a relatively important source of finance for Canadian business 
C) would not arise if the owners of the firm had complete information about the activities of the managers 
D) explains why direct finance is more important than indirect finance as a source of business finance

Question 11

Stocks and bonds supply less than ________ of the external funds for Canadian corporations need to finance their activities.

Accepted Answer

A) one-third 
B) one-quarter 
C) one-half 
D) two-thirds 
A) one-third 
B) one-quarter 
C) one-half 
D) two-thirds

Question 12

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 13

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

Accepted Answer

A) they have weak links to their governments 
B) they make loans only to nonprofit entities 
C) the legal system may be poor making it difficult to enforce restrictive covenants 
D) the accounting standards are too stringent for the banks to meet 
A) they have weak links to their governments 
B) they make loans only to nonprofit entities 
C) the legal system may be poor making it difficult to enforce restrictive covenants 
D) the accounting standards are too stringent for the banks to meet

Question 14

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

Accepted Answer

The principals are the stockholders who

Question 15

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 16

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 17

In the absence of asymmetric information, the lemons problem ________.

Accepted Answer

A) goes away 
B) becomes worse 
C) is not important 
D) remains the same 
A) goes away 
B) becomes worse 
C) is not important 
D) remains the same

Question 18

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 19

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

Accepted Answer

A) Stocks are the most important source of finance for Canadian businesses. 
B) Issuing marketable securities is not the primary way businesses finance their operations. 
C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
D) Banks are the most important source of external funds to finance businesses. 
A) Stocks are the most important source of finance for Canadian businesses. 
B) Issuing marketable securities is not the primary way businesses finance their operations. 
C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. 
D) Banks are the most important source of external funds to finance businesses.

Question 20

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds ________.

Accepted Answer

A) by issuing stock 
B) by issuing bonds 
C) from nonbank loans 
D) from bank loans 
A) by issuing stock 
B) by issuing bonds 
C) from nonbank loans 
D) from bank loans

Exam 8: An Economic Analysis of Financial Structure

A lesson of the Enron collapse is that government regulation ________.

The "lemons problem" exists because of ________.

Because of the adverse selection problem, ________.

Canadian businesses used stocks for external financing ________ percent over the 1970-2002 period.

Which of the following is NOT one of the four types of restrictive covenants?

If all the students in your class pool their money in order to buy one bond and share its return accordingly, in order to eliminate transaction costs, this is an example of ________.

The analysis of how asymmetric information problems affect economic behavior is called ________ theory.

A problem for equity contracts is a particular type of ________ called the ________ problem.

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

The principal-agent problem ________.

Stocks and bonds supply less than ________ of the external funds for Canadian corporations need to finance their activities.

Equity contracts ________.

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

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

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

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

In the absence of asymmetric information, the lemons problem ________.

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

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

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds ________.

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

A problem for equity contracts is a particular type of called the problem.