Question 1

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

Accepted Answer

The answer of What issues do critics cite when discussing...

Question 2

The problem of adverse selection helps to explain

Accepted Answer

A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. 
B) why collateral is an important feature of consumer, but not business, debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) only A and B of the above. 
A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets. 
B) why collateral is an important feature of consumer, but not business, debt contracts. 
C) why direct finance is more important than indirect finance as a source of business finance. 
D) only A and B of the above.

Question 3

The Global Legal Settlement includes what key element?

Accepted Answer

A) It directly reduces conflicts of interest. 
B) It provides incentives for investment banks to not exploit conflicts of interest. 
C) It has measures to improve the quality for information in financial markets. 
D) All of the above. 
A) It directly reduces conflicts of interest. 
B) It provides incentives for investment banks to not exploit conflicts of interest. 
C) It has measures to improve the quality for information in financial markets. 
D) All of the above.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________.

Accepted Answer

A) security issuers; downward 
B) security issuers; upward 
C) investors; downward 
D) regulators; upward 
A) security issuers; downward 
B) security issuers; upward 
C) investors; downward 
D) regulators; upward

Question 7

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 8

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

Accepted Answer

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

Question 9

The problem of adverse selection helps to explain

Accepted Answer

A) why banks prefer to make loans secured by collateral. 
B) why banks have a comparative advantage in raising funds for American businesses. 
C) why borrowers are willing to offer collateral to secure their promises to repay loans. 
D) all of the above. 
E) only A and B of the above. 
A) why banks prefer to make loans secured by collateral. 
B) why banks have a comparative advantage in raising funds for American businesses. 
C) why borrowers are willing to offer collateral to secure their promises to repay loans. 
D) all of the above. 
E) only A and B of the above.

Question 10

One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the

Accepted Answer

A) venture capital firm. 
B) money market mutual fund. 
C) pawn broker. 
D) savings and loan association. 
A) venture capital firm. 
B) money market mutual fund. 
C) pawn broker. 
D) savings and loan association.

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

The Global Legal Settlement of 2002 dealt with conflicts of interest in

Accepted Answer

A) accounting firms. 
B) investment banks. 
C) credit-rating agencies. 
D) all of the above. 
A) accounting firms. 
B) investment banks. 
C) credit-rating agencies. 
D) all of the above.

Question 13

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 14

One reason why indirect financing is used is to minimize adverse selection problems.

Accepted Answer

A) True 
 B)False

Question 15

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

Accepted Answer

A) points. 
B) interest. 
C) collateral. 
D) good faith money. 
A) points. 
B) interest. 
C) collateral. 
D) good faith money.

Question 16

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 17

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 18

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 19

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets.

Accepted Answer

A) True 
 B)False

Exam 7: Why Do Financial Institutions Exist

What issues do critics cite when discussing why Sarbanes-Oxley has led to a decline in U.S. capital markets?

The problem of adverse selection helps to explain

The Global Legal Settlement includes what key element?

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

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

The conflict of interest in credit-rating agencies arises because ________ pay to have securities rated and, as a result, the agencies' ratings may be biased ________.

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

If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

The problem of adverse selection helps to explain

One financial intermediary in our financial structure that helps to reduce the moral hazard arising from the principal-agent problem is the

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

The Global Legal Settlement of 2002 dealt with conflicts of interest in

The majority of household debt in the United States consists of

One reason why indirect financing is used is to minimize adverse selection problems.

Property that is pledged to the lender in the event that a borrower cannot make his or her debt payment is called

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

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

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

The Sarbanes-Oxley Act of 2002 provides for oversight of accounting firms but makes no provisions for increasing the flow of information to financial markets.

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 conflict of interest in credit-rating agencies arises because pay to have securities rated and, as a result, the agencies' ratings may be biased .

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