Question 1

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

Accepted Answer

A) 10% 
B) 20% 
C) 30% 
D) 40% 
A) 10% 
B) 20% 
C) 30% 
D) 40%

Question 2

A debt contract is more likely to be incentive compatible if

Accepted Answer

A) the company must follow standard accounting principles. 
B) the funds are provided by a venture capital firm. 
C) owners of the firm have more of their own money in the business. 
D) all of the above. 
E) only B and C. 
A) the company must follow standard accounting principles. 
B) the funds are provided by a venture capital firm. 
C) owners of the firm have more of their own money in the business. 
D) all of the above. 
E) only B and C.

Question 3

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 anyone but the venture capital firm. 
C) It prohibits the borrowing firm from replacing its management. 
D) It does both A and B of the above. 
E) It does both A and C of the above. 
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 anyone but the venture capital firm. 
C) It prohibits the borrowing firm from replacing its management. 
D) It does both A and B of the above. 
E) It does both A and C of the above.

Question 4

If borrowers take on big risks after obtaining a loan, then lenders face the problem of

Accepted Answer

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

Question 5

Financial intermediaries (banks in particular)have the ability to avoid the free-rider problem as long as they primarily

Accepted Answer

A) make private loans. 
B) acquire a diversified portfolio of stocks. 
C) buy junk bonds. 
D) do a balanced combination of A and B of the above. 
A) make private loans. 
B) acquire a diversified portfolio of stocks. 
C) buy junk bonds. 
D) do a balanced combination of A and B of the above.

Question 6

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

Accepted Answer

A) smaller and less well known; issue securities 
B) larger and more well known; borrow from financial intermediaries 
C) larger and more well known; issue securities 
D) smaller and less well known; need external financing 
A) smaller and less well known; issue securities 
B) larger and more well known; borrow from financial intermediaries 
C) larger and more well known; issue securities 
D) smaller and less well known; need external financing

Question 7

Net worth

Accepted Answer

A) is the difference between current assets and current liabilities. 
B) is the difference between assets and liabilities. 
C) is total assets divided by total liabilities. 
D) is total assets plus total liabilities. 
A) is the difference between current assets and current liabilities. 
B) is the difference between assets and liabilities. 
C) is total assets divided by total liabilities. 
D) is total assets plus total liabilities.

Question 8

Collateralized debt is also called secured debt.

Accepted Answer

A) True 
 B)False

Question 9

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

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 10

Liquidity services are services that

Accepted Answer

A) make it easier for customers to conduct transactions. 
B) conducts transactions for the customer. 
C) increase transaction costs. 
D) all of the above. 
A) make it easier for customers to conduct transactions. 
B) conducts transactions for the customer. 
C) increase transaction costs. 
D) all of the above.

Question 11

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

Accepted Answer

The answer of Evaluate the major provisions of Sarbanes-Oxley and...

Question 12

What is the principal-agent problem?

Accepted Answer

The answer of What is the principal-agent problem?...

Question 13

A conflict of interest occurs when

Accepted Answer

A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service. 
B) lenders prefer higher interest rates and borrowers prefer lower interest rates. 
C) riskier borrowers are the ones who are more likely to apply for loans. 
D) people expected to provide reliable information to the public have incentives not to do so. 
A) a financial firm sells a service to its customers for a price that exceeds the cost of producing the service. 
B) lenders prefer higher interest rates and borrowers prefer lower interest rates. 
C) riskier borrowers are the ones who are more likely to apply for loans. 
D) people expected to provide reliable information to the public have incentives not to do so.

Question 14

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

Accepted Answer

A) True 
 B)False

Question 15

If potential revenues from underwriting greatly exceed brokerage commissions, there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.

Accepted Answer

A) stronger; unbiased 
B) stronger; favorable 
C) weaker; unbiased 
D) weaker; favorable 
A) stronger; unbiased 
B) stronger; favorable 
C) weaker; unbiased 
D) weaker; favorable

Question 16

Investment banks serve two client groups,

Accepted Answer

A) home buyers and mortgage lenders. 
B) people saving for retirement and pension funds. 
C) issuers of securities and investors in those securities. 
D) mutual funds and investors with relatively small amounts to invest. 
A) home buyers and mortgage lenders. 
B) people saving for retirement and pension funds. 
C) issuers of securities and investors in those securities. 
D) mutual funds and investors with relatively small amounts to invest.

Question 17

Because of the adverse selection problem, lenders may refuse loans to individuals with low net worth.

Accepted Answer

A) True 
 B)False

Question 18

Because of the moral hazard problem,

Accepted Answer

A) lenders will write debt contracts that restrict certain activities of borrowers. 
B) lenders will more readily lend to borrowers with high net worth. 
C) debt contracts are used less frequently to raise capital than equity contracts. 
D) all of the above. 
E) only A and B of the above. 
A) lenders will write debt contracts that restrict certain activities of borrowers. 
B) lenders will more readily lend to borrowers with high net worth. 
C) debt contracts are used less frequently to raise capital than equity contracts. 
D) all of the above. 
E) only A and B of the above.

Question 19

What conflicts of interest can arise in investment banking?

Accepted Answer

Conflicts of interest in investment bank

Question 20

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

Accepted Answer

A) 10% 
B) 20% 
C) 30% 
D) 50% 
A) 10% 
B) 20% 
C) 30% 
D) 50%

Exam 7: Why Do Financial Institutions Exist

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

A debt contract is more likely to be incentive compatible if

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

If borrowers take on big risks after obtaining a loan, then lenders face the problem of

Financial intermediaries (banks in particular)have the ability to avoid the free-rider problem as long as they primarily

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

Net worth

Collateralized debt is also called secured debt.

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

Liquidity services are services that

Evaluate the major provisions of Sarbanes-Oxley and the Global Legal Settlement as remedies for conflict of interest problems.

What is the principal-agent problem?

A conflict of interest occurs when

The Sarbanes-Oxley Act of 2002 and the Global Legal Settlement of 2002 both have the potential to reduce economies of scope.

If potential revenues from underwriting greatly exceed brokerage commissions, there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.

Investment banks serve two client groups,

Because of the adverse selection problem, lenders may refuse loans to individuals with low net worth.

Because of the moral hazard problem,

What conflicts of interest can arise in investment banking?

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

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

If potential revenues from underwriting greatly exceed brokerage commissions, there is incentive for investment bank analysts to report information about firms issuing securities.