Question 1

The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance.

Accepted Answer

A) True 
 B)False

Question 2

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

Question 3

Which of the following best explains the recent decline in the role of financial intermediaries?

Accepted Answer

A) Private production and sale of information 
B) Government regulation to increase information 
C) Improvements in information technology 
D) None of the above can explain the recent decline 
A) Private production and sale of information 
B) Government regulation to increase information 
C) Improvements in information technology 
D) None of the above can explain the recent decline

Question 4

The Global Legal Settlement includes what key element?

Accepted Answer

A) It directly reduces conflicts of interest. 
B) It provides incentives for investment banks to not exploit conflicts of interest. 
C) It has measures to improve the quality for information in financial markets. 
D) All of the above. 
A) It directly reduces conflicts of interest. 
B) It provides incentives for investment banks to not exploit conflicts of interest. 
C) It has measures to improve the quality for information in financial markets. 
D) All of the above.

Question 5

The concept of adverse selection helps to explain why indirect finance is more important than direct finance as a source of business finance.

Accepted Answer

A) True 
 B)False

Question 6

Adverse selection

Accepted Answer

A)  is a problem created by asymmetrical information after the transaction. 
B) can be solved by eliminating asymmetrical information. 
C) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
D) all of the above. 
A)  is a problem created by asymmetrical information after the transaction. 
B) can be solved by eliminating asymmetrical information. 
C) occurs when people who do not pay for information take advantage of the information other people have to pay for. 
D) all of the above.

Question 7

In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will

Accepted Answer

A) reflect the highest quality of used cars in the market. 
B) reflect the lowest quality of used cars in the market. 
C) reflect the average quality of used cars in the market. 
D) none of the above. 
A) reflect the highest quality of used cars in the market. 
B) reflect the lowest quality of used cars in the market. 
C) reflect the average quality of used cars in the market. 
D) none of the above.

Question 8

The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information.

Accepted Answer

A) True 
 B)False

Question 9

During the 2007-2009 financial crisis, housing prices began to fall and subprime mortgages began to default. Which of the following statements is true about the rating of subprime mortgage products?

Accepted Answer

A) The rating agencies were way ahead of the market, giving many of the subprime products junk ratings from the start. 
B) Rating agencies were not involved. Subprime mortgages could not be structured, by law. 
C) Many AAA-rated subprime products had to be downgraded over and over again until they reached junk status. 
D) None of the above are true. 
A) The rating agencies were way ahead of the market, giving many of the subprime products junk ratings from the start. 
B) Rating agencies were not involved. Subprime mortgages could not be structured, by law. 
C) Many AAA-rated subprime products had to be downgraded over and over again until they reached junk status. 
D) None of the above are true.

Question 10

A debt contract is said to be incentive compatible if

Accepted Answer

A) the borrower's net worth reduces the probability of moral hazard. 
B) restrictive covenants limit the type of activities that can be undertaken by the borrower. 
C) both A and B of the above occur. 
D) neither A nor B of the above occur. 
A) the borrower's net worth reduces the probability of moral hazard. 
B) restrictive covenants limit the type of activities that can be undertaken by the borrower. 
C) both A and B of the above occur. 
D) neither A nor B of the above occur.

Question 11

(I)In the United States, nonbank loans are the most important source of external funds for nonfinancial businesses. (II)In Germany and Japan, issuing stocks and bonds is the most important source of external for nonfinancial businesses.

Accepted Answer

A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false. 
A) (I)is true, (II)false. 
B) (I)is false, (II)true. 
C) Both are true. 
D) Both are false.

Question 12

Of the following sources of external finance for American nonfinancial businesses, the most 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.

Question 13

A key finding of the economic analysis of financial structure is that

Accepted Answer

A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B) while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets. 
C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D) economists do not have a very good explanation for why securities markets are so heavily regulated. 
A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses. 
B) while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets. 
C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets. 
D) economists do not have a very good explanation for why securities markets are so heavily regulated.

Question 14

A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of

Accepted Answer

A) scope. 
B) scale. 
C) complexity. 
D) information. 
A) scope. 
B) scale. 
C) complexity. 
D) information.

Question 15

Investment banks are guilty of conflict of interest when they

Accepted Answer

A) pressure their analysts to produce research favorable to their client firms. 
B) permit executives of client firms to alter analysts' research on their firms. 
C) prohibit analysts from making negative or controversial comments about client firms. 
D) all of the above. 
A) pressure their analysts to produce research favorable to their client firms. 
B) permit executives of client firms to alter analysts' research on their firms. 
C) prohibit analysts from making negative or controversial comments about client firms. 
D) all of the above.

Question 16

Since firms issuing new securities pay to have these securities rated, the credit-rating agencies have incentive to ________ to attract more business.

Accepted Answer

A) give favorable ratings 
B) give impartial ratings 
C) lower the fees they charge 
D) practice spinning 
A) give favorable ratings 
B) give impartial ratings 
C) lower the fees they charge 
D) practice spinning

Question 17

Distinguish between adverse selection and moral hazard.

Accepted Answer

The answer of Distinguish between adverse selection and moral hazard....

Question 18

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) free-riding. 
D) costly state verification. 
A) moral hazard. 
B) adverse selection. 
C) free-riding. 
D) costly state verification.

Question 19

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.

Accepted Answer

A) low; moral hazard 
B) low; adverse selection 
C) high; moral hazard 
D) high; adverse selection 
A) low; moral hazard 
B) low; adverse selection 
C) high; moral hazard 
D) high; adverse selection

Question 20

The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in

Accepted Answer

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

Exam 7: Why Do Financial Institutions Exist

The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance.

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

Which of the following best explains the recent decline in the role of financial intermediaries?

The Global Legal Settlement includes what key element?

The concept of adverse selection helps to explain why indirect finance is more important than direct finance as a source of business finance.

Adverse selection

In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay will

The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information.

During the 2007-2009 financial crisis, housing prices began to fall and subprime mortgages began to default. Which of the following statements is true about the rating of subprime mortgage products?

A debt contract is said to be incentive compatible if

(I)In the United States, nonbank loans are the most important source of external funds for nonfinancial businesses. (II)In Germany and Japan, issuing stocks and bonds is the most important source of external for nonfinancial businesses.

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

A key finding of the economic analysis of financial structure is that

A financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of economies of

Investment banks are guilty of conflict of interest when they

Since firms issuing new securities pay to have these securities rated, the credit-rating agencies have incentive to ________ to attract more business.

Distinguish between adverse selection and moral hazard.

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be ________, which gives rise to the problem of ________.

The Sarbanes-Oxley Act of 2002 dealt with conflicts of interest in

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

Because of the lemons problem in the used car market, the average quality of the used cars offered for sale will be , which gives rise to the problem of .