Question 1

Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) Federal Corporate Securities Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) U)S. Treasury Department. 
E) Federal Reserve System. 
A) Federal Corporate Securities Commission. 
B) Federal Trade Commission. 
C) Securities and Exchange Commission. 
D) U)S. Treasury Department. 
E) Federal Reserve System.

Question 4

The concept of adverse selection helps to explain

Accepted Answer

A) why collateral is not a common feature of many debt contracts. 
B) why large, well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) all of the above. 
A) why collateral is not a common feature of many debt contracts. 
B) why large, well-established corporations find it so difficult to borrow funds in securities markets. 
C) why financial markets are among the most heavily regulated sectors of the economy. 
D) all of the above.

Question 5

Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets?

Accepted Answer

A) requiring a firm's chief officers to certify its financial statements and other disclosures 
B) requiring investment banks to make their analysts' recommendations public 
C) requiring disclosure of off-balance-sheet transactions 
D) increasing resources available to the Securities and Exchange Commission to supervise financial markets 
A) requiring a firm's chief officers to certify its financial statements and other disclosures 
B) requiring investment banks to make their analysts' recommendations public 
C) requiring disclosure of off-balance-sheet transactions 
D) increasing resources available to the Securities and Exchange Commission to supervise financial markets

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

The majority of household debt in the United States consists of

Accepted Answer

A) credit card debt. 
B) consumer installment debt. 
C) collateralized loans. 
D) unsecured loans, such as student loans. 
A) credit card debt. 
B) consumer installment debt. 
C) collateralized loans. 
D) unsecured loans, such as student loans.

Question 8

The authors' analysis of adverse selection indicates that financial intermediaries in general, and banks in particular (because they hold a large fraction of nontraded loans),

Accepted Answer

A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than direct finance. 
B) play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem. 
C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations, which rely to a greater extent on the new issues market for funds. 
D) all of the above. 
E) only A and B of the above. 
A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than direct finance. 
B) play a greater role in moving funds to corporations than do securities markets as a result of their ability to overcome the free-rider problem. 
C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations, which rely to a greater extent on the new issues market for funds. 
D) all of the above. 
E) only A and B of the above.

Question 9

Why should we be concerned about conflicts of interest in the financial services industry?

Accepted Answer

The answer of Why should we be concerned about conflicts...

Question 10

(I)The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II)Financial intermediaries facilitate diversification when an investor has only a small sum to invest.

Accepted Answer

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

Question 11

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.

Accepted Answer

A) True 
 B)False

Question 12

The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the investment banking industry.

Accepted Answer

A) True 
 B)False

Question 13

Conflicts of interest in the Arthur Andersen accounting firm intensified when ________ became the firm's largest source of profits and large clients pressured ________ office managers to give favorable audits.

Accepted Answer

A) consulting; regional 
B) consulting; national 
C) auditing; regional 
D) auditing; national 
A) consulting; regional 
B) consulting; national 
C) auditing; regional 
D) auditing; national

Question 14

Economies of scale

Accepted Answer

A) in the financial markets does not explain why financial intermediaries developed and have become such an important part of our financial structure. 
B) can be used to an advantage by reducing transaction cost. 
C) both A and B of the above. 
D) neither A nor B of the above. 
A) in the financial markets does not explain why financial intermediaries developed and have become such an important part of our financial structure. 
B) can be used to an advantage by reducing transaction cost. 
C) both A and B of the above. 
D) neither A nor B of the above.

Question 15

Spinning is the practice of

Accepted Answer

A) investment banks allowing executives of potential client companies to buy underpriced initial public offerings of other companies' securities. 
B) investment bank analysts providing misleading information about a company to encourage more investors to purchase the company's securities. 
C) accounting firms encouraging its audit clients to also purchase its management advisory services. 
D) credit rating agencies providing higher ratings on a company's securities in order to develop a long-term relationship with the company. 
A) investment banks allowing executives of potential client companies to buy underpriced initial public offerings of other companies' securities. 
B) investment bank analysts providing misleading information about a company to encourage more investors to purchase the company's securities. 
C) accounting firms encouraging its audit clients to also purchase its management advisory services. 
D) credit rating agencies providing higher ratings on a company's securities in order to develop a long-term relationship with the company.

Question 16

Equity contracts account for a small fraction of external funds raised by American businesses because

Accepted Answer

A) costly state verification makes the equity contract less desirable than the debt contract. 
B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) all of the above. 
E) both A and B of the above. 
A) costly state verification makes the equity contract less desirable than the debt contract. 
B) there is greater scope for moral hazard problems under equity contracts, as compared to debt contracts. 
C) equity contracts do not permit borrowing firms to raise additional funds by issuing debt. 
D) all of the above. 
E) both A and B of the above.

Question 17

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

Accepted Answer

A) True 
 B)False

Question 18

What conflicts of interest can arise in credit-rating agencies?

Accepted Answer

The answer of What conflicts of interest can arise in...

Question 19

Because of the adverse selection problem,

Accepted Answer

A) lenders may make a disproportionate amount of loans to bad credit risks. 
B) lenders may refuse loans to individuals with low net worth. 
C) lenders are reluctant to make loans that are not secured by collateral. 
D) all of the above. 
A) lenders may make a disproportionate amount of loans to bad credit risks. 
B) lenders may refuse loans to individuals with low net worth. 
C) lenders are reluctant to make loans that are not secured by collateral. 
D) all of the above.

Question 20

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

Accepted Answer

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

Exam 7: Why Do Financial Institutions Exist

Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.

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

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

The concept of adverse selection helps to explain

Which of the following provisions of legislation to deal with conflicts of interest does not increase the flow of information in financial markets?

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.

The majority of household debt in the United States consists of

The authors' analysis of adverse selection indicates that financial intermediaries in general, and banks in particular (because they hold a large fraction of nontraded loans),

Why should we be concerned about conflicts of interest in the financial services industry?

(I)The total cost of carrying out a transaction in financial markets increases proportionally with the size of the transaction. (II)Financial intermediaries facilitate diversification when an investor has only a small sum to invest.

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.

The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the investment banking industry.

Conflicts of interest in the Arthur Andersen accounting firm intensified when ________ became the firm's largest source of profits and large clients pressured ________ office managers to give favorable audits.

Economies of scale

Spinning is the practice of

Equity contracts account for a small fraction of external funds raised by American businesses because

The Sarbanes-Oxley Act of 2002 established a Public Company Accounting Oversight Board (PCAOB), overseen by the SEC, to supervise accounting firms and ensure that audits are independent and controlled for quality.

What conflicts of interest can arise in credit-rating agencies?

Because of the adverse selection problem,

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

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

Conflicts of interest in the Arthur Andersen accounting firm intensified when became the firm's largest source of profits and large clients pressured office managers to give favorable audits.

The problem created by asymmetric information before the transaction occurs is called , while the problem created after the transaction occurs is called .