Question 1

What conflicts of interest can arise in investment banking?

Accepted Answer

Conflicts of interest in investment bank

Question 2

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 3

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.

Question 4

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 5

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 6

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 7

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 8

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 9

A bank

Accepted Answer

A) has the ability to profit from the information it produces. 
B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market. 
C) becomes an expert in determining good firms from bad firms. 
D) all of the above. 
A) has the ability to profit from the information it produces. 
B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are traded in the open market. 
C) becomes an expert in determining good firms from bad firms. 
D) all of the above.

Question 10

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 11

Collateralized debt is also called secured debt.

Accepted Answer

A) True 
 B)False

Question 12

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 13

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

Accepted Answer

A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation 
A) principal-agent 
B) adverse selection 
C) free-rider 
D) debt deflation

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

What facts about financial structure can be explained by adverse selection?

Accepted Answer

The answer of What facts about financial structure can be...

Question 17

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 18

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 19

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 20

Solutions to the moral hazard problem include

Accepted Answer

A) high net worth. 
B) monitoring and enforcement of restrictive covenants. 
C) greater reliance on equity contracts and less on debt contracts. 
D) all of the above. 
E) only A and B of the above. 
A) high net worth. 
B) monitoring and enforcement of restrictive covenants. 
C) greater reliance on equity contracts and less on debt contracts. 
D) all of the above. 
E) only A and B of the above.

Exam 7: Why Do Financial Institutions Exist

What conflicts of interest can arise in investment banking?

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

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

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

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.

The authors' analysis of adverse selection indicates that financial intermediaries

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.

A debt contract is said to be incentive compatible if

A bank

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

Collateralized debt is also called secured debt.

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?

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.

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

Because of the adverse selection problem,

What facts about financial structure can be explained by adverse selection?

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

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

The concept of adverse selection helps to explain

Solutions to the moral hazard problem include

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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