Question 1

Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?

Accepted Answer

A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior. 
B) Covenants require that borrowers keep collateral in good condition. 
C) Covenants require periodic accounting statements and income reports. 
D) All of the above. 
E) Only A and B of the above. 
A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior. 
B) Covenants require that borrowers keep collateral in good condition. 
C) Covenants require periodic accounting statements and income reports. 
D) All of the above. 
E) Only A and B of the above. D

Question 2

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

Accepted Answer

A) loans from banks. 
B) stocks. 
C) bonds and commercial paper. 
D) nonbank loans. 
A) loans from banks. 
B) stocks. 
C) bonds and commercial paper. 
D) nonbank loans. B

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) all of the above. 
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) all of the above. C

Question 4

The concept of adverse selection helps explain why collateral is an important feature of many debt contracts.

Accepted Answer

A) True 
 B)False

Question 5

American businesses get more funds from direct financing than from indirect financing.

Accepted Answer

A) True 
 B)False

Question 6

One reason why indirect financing is used is to minimize adverse selection problems.

Accepted Answer

A) True 
 B)False

Question 7

The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________.

Accepted Answer

A) security issuers; downward 
B) security issuers; upward 
C) investors; downward 
D) regulators; upward 
A) security issuers; downward 
B) security issuers; upward 
C) investors; downward 
D) regulators; upward

Question 8

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

Accepted Answer

A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) 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. 
C) Collateral is a prevalent feature of debt contracts for both households and businesses. 
D) New security issues is the most important source of external funds to finance businesses. 
A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) 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. 
C) Collateral is a prevalent feature of debt contracts for both households and businesses. 
D) New security issues is the most important source of external funds to finance businesses.

Question 9

What facts about financial structure can be explained by moral hazard?

Accepted Answer

Moral hazard refers to a situation where

Question 10

Moral hazard is a problem associated with debt and equity contracts arising from

Accepted Answer

A) the borrower's incentive to undertake highly risky investments. 
B) the owners' inability to ensure that managers will act in the owners' interest. 
C) the difficulty lenders have in sorting out good credit risks from bad credit risks. 
D) all of the above. 
E) only A and B of the above. 
A) the borrower's incentive to undertake highly risky investments. 
B) the owners' inability to ensure that managers will act in the owners' interest. 
C) the difficulty lenders have in sorting out good credit risks from bad credit risks. 
D) all of the above. 
E) only A and B of the above.

Question 11

That most used cars are sold by intermediaries (i.e., used car dealers)provides evidence that these intermediaries

Accepted Answer

A) provide information that is valued by consumers of used cars. 
B) are able to prevent others from free-riding off the information that they provide. 
C) can profit by becoming experts in determining whether an automobile is a good car or a lemon. 
D) do all of the above. 
A) provide information that is valued by consumers of used cars. 
B) are able to prevent others from free-riding off the information that they provide. 
C) can profit by becoming experts in determining whether an automobile is a good car or a lemon. 
D) do all of the above.

Question 12

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

Accepted Answer

The answer of What issues do critics cite when discussing...

Question 13

What factors usually cause an increase in moral hazard and adverse selection?

Accepted Answer

There are several factors that can contr

Question 14

The problem of adverse selection helps to explain

Accepted Answer

A) why banks prefer to make loans secured by collateral. 
B) why banks have a comparative advantage in raising funds for American businesses. 
C) why borrowers are willing to offer collateral to secure their promises to repay loans. 
D) all of the above. 
E) only A and B of the above. 
A) why banks prefer to make loans secured by collateral. 
B) why banks have a comparative advantage in raising funds for American businesses. 
C) why borrowers are willing to offer collateral to secure their promises to repay loans. 
D) all of the above. 
E) only A and B of the above.

Question 15

Because managers (________)have less incentive to maximize profits than the stockholders-owners (________)do, stockholders find it costly to monitor managers; thus, stockholders are reluctant to purchase equities.

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 16

The U.S. has more lawyers per capita than any other country in the world. It is also among the richest countries in the world. Explain why these two facts may not be mere coincidence.

Accepted Answer

The answer of The U.S. has more lawyers per capita...

Question 17

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

Accepted Answer

A) The financial system is among the most heavily regulated sectors of the economy. 
B) Issuing marketable securities is 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) Financial intermediaries is the most important source of external funds to finance businesses. 
A) The financial system is among the most heavily regulated sectors of the economy. 
B) Issuing marketable securities is 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) Financial intermediaries is the most important source of external funds to finance businesses.

Question 18

The Global Legal Settlement of 2002 dealt with conflicts of interest in

Accepted Answer

A) accounting firms. 
B) investment banks. 
C) credit-rating agencies. 
D) all of the above. 
A) accounting firms. 
B) investment banks. 
C) credit-rating agencies. 
D) all of the above.

Question 19

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

Accepted Answer

A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. 
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households. 
C) The stock market accounted for the largest share of the financing of American businesses in the 1970-2000 period. 
D) All of the above. 
E) Only A and B of the above. 
A) Marketable securities account for a larger share of external business financing in the United States than in most other countries. 
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been sold directly to American households. 
C) The stock market accounted for the largest share of the financing of American businesses in the 1970-2000 period. 
D) All of the above. 
E) Only A and B of the above.

Question 20

The financial system is one of the most heavily regulated sectors of the economy.

Accepted Answer

A) True 
 B)False

Exam 7: Why Do Financial Institutions Exist

Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?

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

Because of the adverse selection problem,

The concept of adverse selection helps explain why collateral is an important feature of many debt contracts.

American businesses get more funds from direct financing than from indirect financing.

One reason why indirect financing is used is to minimize adverse selection problems.

The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________.

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

What facts about financial structure can be explained by moral hazard?

Moral hazard is a problem associated with debt and equity contracts arising from

That most used cars are sold by intermediaries (i.e., used car dealers)provides evidence that these intermediaries

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

What factors usually cause an increase in moral hazard and adverse selection?

The problem of adverse selection helps to explain

Because managers (________)have less incentive to maximize profits than the stockholders-owners (________)do, stockholders find it costly to monitor managers; thus, stockholders are reluctant to purchase equities.

The U.S. has more lawyers per capita than any other country in the world. It is also among the richest countries in the world. Explain why these two facts may not be mere coincidence.

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

The Global Legal Settlement of 2002 dealt with conflicts of interest in

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

The financial system is one of the most heavily regulated sectors of the economy.

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

The conflict of interest in credit-rating agencies arises because pay to have securities rated and, as a result, the agencies' ratings may be biased .

Because managers ()have less incentive to maximize profits than the stockholders-owners ()do, stockholders find it costly to monitor managers; thus, stockholders are reluctant to purchase equities.