Question 1

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 2

Distinguish between adverse selection and moral hazard.

Accepted Answer

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

Question 3

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 4

Which of the following is not one of the eight basic facts about financial structure?

Accepted Answer

A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and businesses. 
D) New security issues is the most important source of external funds to finance businesses. 
A) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower. 
B) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets. 
C) Collateral is a prevalent feature of debt contracts for both households and businesses. 
D) New security issues is the most important source of external funds to finance businesses.

Question 5

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 6

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 7

Auditors attempt to reduce information asymmetry between a firm's managers and its

Accepted Answer

A) customers. 
B) owners. 
C) employees. 
D) competitors. 
A) customers. 
B) owners. 
C) employees. 
D) competitors.

Question 8

Of the following sources of external finance for American nonfinancial businesses, the least 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 9

Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?

Accepted Answer

A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior. 
B) Covenants require that borrowers keep collateral in good condition. 
C) Covenants require periodic accounting statements and income reports. 
D) All of the above. 
E) Only A and B of the above. 
A) Covenants reduce moral hazard by restricting borrowers' undesirable behavior. 
B) Covenants require that borrowers keep collateral in good condition. 
C) Covenants require periodic accounting statements and income reports. 
D) All of the above. 
E) Only A and B of the above.

Question 10

What facts about financial structure can be explained by moral hazard?

Accepted Answer

Moral hazard refers to a situation where

Question 11

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 12

What is the principal-agent problem?

Accepted Answer

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

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

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

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

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

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.

Question 18

Conflicts of interest pose a problem because they

Accepted Answer

A) lower the quality of information. 
B) increase problems of asymmetric information. 
C) make the financial system less efficient. 
D) do all of the above. 
A) lower the quality of information. 
B) increase problems of asymmetric information. 
C) make the financial system less efficient. 
D) do all of the above.

Question 19

The principal-agent problem

Accepted Answer

A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) would not arise if the owners of the firm had complete information about the activities of the managers. 
C) in financial markets helps to explain why equity is a relatively important source of finance for American businesses. 
D) all of the above. 
E) only A and B of the above. 
A) occurs when managers have more incentive to maximize profits than the stockholders-owners do. 
B) would not arise if the owners of the firm had complete information about the activities of the managers. 
C) in financial markets helps to explain why equity is a relatively important source of finance for American businesses. 
D) all of the above. 
E) only A and B of the above.

Question 20

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

Exam 7: Why Do Financial Institutions Exist

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

Distinguish between adverse selection and moral hazard.

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

Which of the following is not one of the eight basic facts about financial structure?

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

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

Auditors attempt to reduce information asymmetry between a firm's managers and its

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

Which of the following are accurate statements concerning the role that restrictive covenants play in reducing moral hazard in financial markets?

What facts about financial structure can be explained by moral hazard?

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

What is the principal-agent problem?

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

Economies of scale

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

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

Economies of scope refer to cost savings that arise when the

Conflicts of interest pose a problem because they

The principal-agent problem

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

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