Exam 7: Why Do Financial Institutions Exist?

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

With regard to external sources of financing for nonfinancial businesses in the United States,which of the following are accurate statements?

The Global Legal Settlement of 2002 arose out of a lawsuit brought by New York Attorney General Eliot Spitzer against the ten largest investment banks.

Because of the moral hazard problem,

Distinguish between adverse selection and moral hazard.

Agency theory focuses on how government agencies regulate financial intermediaries and markets.

A bank

A conflict of interest between providing impartial research about companies issuing securities and selling those same securities arises in

In the United States,the government agency requiring that firms,which sell securities in public markets,adhere to standard accounting principles and disclose information about their sales,assets,and earnings is the

Issuing marketable securities is the primary way businesses finance their operations.

Net worth

What conflicts of interest can arise in investment banking?

The authors' analysis of adverse selection indicates that financial intermediaries

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

Economies of scale

An audit certifies that

Because of the adverse selection problem,

Due to criticisms of rating agencies following the default of many subprime products,the SEC prohibited credit rating agencies from structuring the same products that they rate.

Spinning is the practice of

The pecking order hypothesis predicts that the ________ a corporation is,the more likely it will be to ________.