Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) investment banking. 
B) commercial banking. 
C) accounting firms. 
D) mutual funds. 
A) investment banking. 
B) commercial banking. 
C) accounting firms. 
D) mutual funds.

Question 3

An advantage of providing multiple financial services within one financial institution is that it

Accepted Answer

A) lowers information costs. 
B) develops broader long-term relationships with customers. 
C) both A and B of the above. 
D) none of the above. 
A) lowers information costs. 
B) develops broader long-term relationships with customers. 
C) both A and B of the above. 
D) none of the above.

Question 4

Collateral is

Accepted Answer

A) property that is pledged to the lender if a borrower cannot make his or her debt payments. 
B) a prevalent feature of debt contracts for households. 
C) a prevalent feature of debt contracts for businesses. 
D) all of the above. 
E) only A and C of the above. 
A) property that is pledged to the lender if a borrower cannot make his or her debt payments. 
B) a prevalent feature of debt contracts for households. 
C) a prevalent feature of debt contracts for businesses. 
D) all of the above. 
E) only A and C of the above.

Question 5

A debt contract that specifies that the company can only use the funds to finance certain activities

Accepted Answer

A) is a private loan. 
B) contains a restrictive covenant. 
C) increases the problem of adverse selection. 
D) all of the above. 
E) only A and B of the above. 
A) is a private loan. 
B) contains a restrictive covenant. 
C) increases the problem of adverse selection. 
D) all of the above. 
E) only A and B of the above.

Question 6

What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?

Accepted Answer

The answer of What are economies of scale in financial...

Question 7

Bad firms

Accepted Answer

A) do not have an incentive to make themselves look good. 
B) will slant the information they are required to transmit to the public. 
C) both A and B of the above. 
D) neither A nor B of the above. 
A) do not have an incentive to make themselves look good. 
B) will slant the information they are required to transmit to the public. 
C) both A and B of the above. 
D) neither A nor B of the above.

Question 8

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

Accepted Answer

A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B) are able to prevent potential competitors from free-riding off the information that they provide. 
C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D) do all of the above. 
A) have been afforded special government treatment, since used car dealers do not provide information that is valued by consumers of used cars. 
B) are able to prevent potential competitors from free-riding off the information that they provide. 
C) have failed to solve adverse selection problems in this market because "lemons" continue to be traded. 
D) do all of the above.

Question 9

What is the free-rider problem? Describe some situations that this problem creates.

Accepted Answer

The free-rider problem refers to a situa

Question 10

Debt contracts

Accepted Answer

A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B) have an advantage over equity contracts in that they have a lower cost of state verification. 
C) are used much more frequently to raise capital than equity contracts. 
D) all of the above. 
E) only A and B of the above. 
A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals. 
B) have an advantage over equity contracts in that they have a lower cost of state verification. 
C) are used much more frequently to raise capital than equity contracts. 
D) all of the above. 
E) only A and B of the above.

Question 11

Commercial and farm mortgages, in which property is pledged as collateral, account for

Accepted Answer

A) one-quarter of borrowing by nonfinancial businesses. 
B) one-half of borrowing by nonfinancial businesses. 
C) one-twentieth of borrowing by nonfinancial businesses. 
D) two-thirds of borrowing by nonfinancial businesses. 
A) one-quarter of borrowing by nonfinancial businesses. 
B) one-half of borrowing by nonfinancial businesses. 
C) one-twentieth of borrowing by nonfinancial businesses. 
D) two-thirds of borrowing by nonfinancial businesses.

Question 12

The authors' analysis of adverse selection indicates that financial intermediaries

Accepted Answer

A) overcome free-rider problems by holding nontraded loans. 
B) must buy securities from corporations to diversify the risk that results from holding nontradable loans. 
C) have not been very successful in dealing with adverse selection problems in financial markets. 
D) do all of the above. 
E) do only A and B of the above. 
A) overcome free-rider problems by holding nontraded loans. 
B) must buy securities from corporations to diversify the risk that results from holding nontradable loans. 
C) have not been very successful in dealing with adverse selection problems in financial markets. 
D) do all of the above. 
E) do only A and B of the above.

Question 13

Adverse selection is a problem associated with equity and debt contracts arising from

Accepted Answer

A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. 
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. 
C) the borrower's lack of incentive to seek a loan for highly risky investments. 
D) none of the above. 
A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. 
B) the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults. 
C) the borrower's lack of incentive to seek a loan for highly risky investments. 
D) none of the above.

Question 14

An audit certifies that

Accepted Answer

A) a firm's loans will be repaid. 
B) a firm's securities are safe investments. 
C) a firm abides by standard accounting principles. 
D) the information reported in a firm's accounting statements is correct. 
A) a firm's loans will be repaid. 
B) a firm's securities are safe investments. 
C) a firm abides by standard accounting principles. 
D) the information reported in a firm's accounting statements is correct.

Question 15

What conflicts of interest can arise in accounting firms?

Accepted Answer

Conflicts of interest in accounting firm

Question 16

Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that

Accepted Answer

A) prevent lenders from foreclosing on borrowers with political clout. 
B) nationalize banks and direct credit to politically favored borrowers. 
C) make it costly to collect payments and collateral from defaulting debtors. 
D) do all of the above. 
E) do only A and B of the above. 
A) prevent lenders from foreclosing on borrowers with political clout. 
B) nationalize banks and direct credit to politically favored borrowers. 
C) make it costly to collect payments and collateral from defaulting debtors. 
D) do all of the above. 
E) do only A and B of the above.

Question 17

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of

Accepted Answer

A) a restrictive covenant. 
B) a collusive agreement between mortgage lenders and insurance companies. 
C) both A and B of the above. 
D) neither A nor B of the above. 
A) a restrictive covenant. 
B) a collusive agreement between mortgage lenders and insurance companies. 
C) both A and B of the above. 
D) neither A nor B of the above.

Question 18

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that

Accepted Answer

A) borrowers may find loopholes that make the covenants ineffective. 
B) they are costly to monitor and enforce. 
C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts. 
D) all of the above. 
E) only A and B of the above. 
A) borrowers may find loopholes that make the covenants ineffective. 
B) they are costly to monitor and enforce. 
C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts. 
D) all of the above. 
E) only A and B of the above.

Question 19

Economies of scope refer to cost savings that arise when the

Accepted Answer

A) size of financial transactions increase. 
B) size of financial transactions decrease. 
C) number of different activities undertaken increases. 
D) number of different activities undertaken decreases. 
A) size of financial transactions increase. 
B) size of financial transactions decrease. 
C) number of different activities undertaken increases. 
D) number of different activities undertaken decreases.

Exam 7: Why Do Financial Institutions Exist

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

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

An advantage of providing multiple financial services within one financial institution is that it

Collateral is

A debt contract that specifies that the company can only use the funds to finance certain activities

What are economies of scale in financial transactions? How can financial intermediaries achieve these economies?

Bad firms

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

What is the free-rider problem? Describe some situations that this problem creates.

Debt contracts

Commercial and farm mortgages, in which property is pledged as collateral, account for

The authors' analysis of adverse selection indicates that financial intermediaries

Adverse selection is a problem associated with equity and debt contracts arising from

An audit certifies that

What conflicts of interest can arise in accounting firms?

Governments in developing countries sometimes adopt policies that retard the efficient operation of their financial systems. These actions include policies that

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is that

Economies of scope refer to cost savings that arise when the

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

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