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63 Cards in this Set

  • Front
  • Back

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their activities




A. State-owned business firms


B. Sole proprietorships, partnerships, and small corporations


C. Industrial firms producing manufactured goods.


D. Multinational firms



Sole proprietorships, partnerships, and small corporations

Which of the following statements concerning external sources of financing for non-financial businesses in the US is true?




A. Financial intermediaries such as banks are the least important source of external funds for businesses


B. Since 1970, more than half of the new issues of stock have been sold to American households


C. Stocks and bonds combined more than one-half of the external funds.


D. Bonds are far more important source of financing than are stocks

Bonds are far more important source of financing than are stocks

Of the sources of external funds for non-financial businesses in the United States, loans from banks and other financial intermediaries account for approximately _______ of the total




A. 6%


B. 40%


C. 56%


D. 60%

56%

Of the sources of external funds for non-financial businesses in the United States, corporate bonds and commercial paper account for approximately ______ of the total




A. 5%


B. 10%


C. 32%


D. 50%

32%

Of the following sources of external finance for American non-financial businesses, the least important is




A. Stocks


B. Loans from other financial intermediaries


C. Loans from banks


D. Bonds and commercial paper

Stocks

Of the sources of external funds for non-financial businesses in the US, stocks account for approximately _____ of the total




A. 2%


B. 11%


C. 20%


D. 40%

11%

Which of the following statements concerning external sources of financing for non-financial businesses in the US are true?




A. Stocks are a far more important source of finance than are bonds


B. Since 1970, more than half of the new issues of stock have been sold to American households


C. Financial intermediaries are the least important of external funds for businesses


D. Stocks and bonds, combined, supply less than one-half of the external funds

Stocks and bonds, combined, supply less than one-half of the external funds

Non-financial businesses in Germany, Japan, and Canada raise most of their funds.




A. From non-bank loans


B. By issuing stock


C. From bank loans


D. By issuing bonds

From bank loans

Regulation of the financial system




A. Protects the jobs of employees of financial institutions


B Occurs only in the US


C. Protects the wealth of owners of financial institutions


D. Ensure the stability of the financial system

Ensure the stability of the financial system

Collateralized debt is also known as




A. Secured debt


B. Unrestricted debt


C. Unsecured debt


D. Promissory debt

Secured debt

Credit card debt is




A. Unsecured debt


B. Unrestricted debt


C. Secured debt


D. Restricted debt

Unsecured debt

The predominant form of household debt is




A. Collateralized debt


B. Unsecured debt


C. Unrestricted debt


D. Consumer installment debt

Collateralized debt

How can economies of scale help explain the existence of financial intermediaries?




A. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers


B. Financial intermediaries have exclusive access to communications technology in the financial sector


C. Financial intermediaries with their vault technology can specialize in keeping deposits safe.


D. Financial intermediaries are relatively large institutions

Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers

The structure of financial markets is the result of:




A. adapting to continually changing government regulations


B. regulating the great number of small firms in the US


C. Attempting to reduce transaction costs


D. Attempting to cartelize the provision of financial services

Attempting to reduce transaction costs

The current structure of financial markets can be best understood as the result of attempts by financial market participants




A. Reduce transaction costs


B. Cartelize the provision of financial services


C. deal with the great number of small firms in the US


D. Adapt to continually changing government regulations

Reduce transaction costs

Which of the following is not a benefit to an individual purchasing a mutual fund




A. Diversification


B. Reduced risk


C. Lower transaction costs


D. Free-Riding

Free-Riding

Financial intermediaries develop _______ in things such as computer technology which allows them to lower transaction




A. Expertise


B. Diversification


C. Equity


D. Regulations

Expertise

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done so?




A. You would be more willing because putting her life savings into her business provides you protecting against the problem of moral hazard


B. Whether or not she puts her life savings into her business has no bearing on whether she repays the loan or not. Therefore, it should have no effect on your decision to loan her money

You would be more willing because putting her life savings into her business provides you protecting against the problem of moral hazard

How can the existence of asymmetric information provide a rationale for government regulations of financial markets




A. The production of information to combat these asymmetries is subject to the free-rider problem


B. Good information become quickly obsolete


C. The production of good information is so costly that all potential buyers of this information are priced out of the market



The production of information to combat these asymmetries is subject to the free-rider problem

Problems created by asymmetric informatin after the transaction occurs is called _____, while the problem created before transaction occurs is is called




A. Free riding; costly state verification


B. Adverse selection; moral hazard


C. Costly state verification; free riding


D. Moral hazard; adverse selection

Moral hazard; adverse selection

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





A. Moral hazard; adverse selection


B. Adverse selection; moral hazard


C. Costly state verification; free-riding


D. Free-riding; costly state verification

Adverse selection; moral hazard

The problem faced by the lender that the borrower may take on additional risk after receiving the loan is called




A. Adverse selection


B Moral Hazard


C. Diversification


D. Transaction Costs

Moral Hazard

The "lemons problem' in used car markets causes;




A. only average-quality vehicles to be driven out of the market


B. all high-quality vehicles to be driven out of the market


C. low-quality vehicles to be driven out of the market


D. only above-average quality vehicles to be sold



all high-quality vehicles to be driven out of the market

The free rider problem




A. will make more people willing to provide information


B. Will only occur if information costs are zero


C. Makes it easier for an investor to continue to buy securities at less than the true value


D. Results from the production of information being much like a public good where exclusion is not possible

Results from the production of information being much like a public good where exclusion is not possible

The "lemons problem" exists because of




A. Economies of scale


B. Rational Expectation


C. Asymmetric Information


D. Transaction costs

Asymmetric Information

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




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% loss if the borrower defaults


C. The borrower's lack of incentive to seek of a loan for highly risky investment


D. The lender's inability to restrict the borrower from changing his behavior once given a loan

The lender's relative lack of information about the borrower's potential returns and risks of his investment activities

Government regulations require publicly traded firms to provide information, reducing




A. Economies of Scale


B. Transaction Costs


C. The adverse selection problem


D. The need for diversification

The adverse selection problem

Analysis of adverse selection indicates that financial intermediaries, especially banks.




A. Provide better - known and larger corporations a higher percentage of their external funds than the do to newer and smaller corporations which rely to a greater extent on the new issues market for funds


B. Must buy securities from corporations to diversify the risk that results from holding non-tradable loans.


C. Despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations


D. Have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.

Have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.

As information technology improves, the lending role of financial such as banks should ______




A. Increase siginifcantly


B. Decrease


C. Stay the same


D. Increase somewhat

Decrease

The concept of adverse selection helps to explain




A. Why financial markets are among the most heavily regulated sectors of the economy


B. Why large, well -established corporations find it so difficult to borrow funds in securities markets


C. Why collateral is not a common feature of many debt contracts


D. Why stocks are the most important source of external financing for businesses

Why financial markets are among the most heavily regulated sectors of the economy

What might lead to poor management when control and ownership are separate, like in many American corporations?




A. Principal-agent problem


B. Sarbanes-Oxley problem


C. Free-rider problem


D. Adverse selection




What is the reason for this problem?




A. A manager does not have sufficient incentive to maximize the company's profits


B. A manager does not have access to sufficient resources to run the corporation efficiently


C. Stockholder meetings are infrequent and the manager has to wait for these results to get anything done.


D. Owners limit the manager's ability to run the corporation efficiently


Principal-agent problem




A manager does not have sufficient incentive to maximize the company's profits

Asymmetric information 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




A. Debt deflation


B. Principal-agent


C. Free-rider


D. Adverse selection

Principal-agent



An institution in our financial structure that helps reduce the moral hazard arising from the principal-agent problem is the:




A. Savings and loan association


B. Money market mutual fund


C. Venture capital firm


D. Pawn Broker

Venture capital firm

A problem for equity contracts is a particular type of ____ called the ____ problem




A. Adverse selection; free-rider


B. Moral hazard; free-rider


C. Adverse selection; principal-agent


D. Moral hazard; principal-agent

Moral hazard; principal-agent

Managers (_____) may act in their own interest rather than in the interest of the stockholder-owner (______) because the managers have less incentive to maximize profits than the stockholder-owners do.




A. Principals; agents


B. Agents; principals


C. Principals; principals


D. Agents; agents

Agents; principals

The name economists give the process by which stockholders gather information by frequent monitoring of the firm's activities is




A. Costly avoidance


B. The free-rider problem


C. Debt Intermediation


D. Costly state verification

Costly state verification

Government regulations designed to reduce the moral hazard problem include




A. Light sentences for those who commit the fraud of hiding and stealing profits


B. State verification subsidies


C. State licensing restrictions


D. Laws that force firms to adhere to standard accounting principles

Laws that force firms to adhere to standard accounting principles

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




A. Savings and loan association


B. Venture capital firm


C. Money market mutual fund


D. Pawn broker



Venture Capital Firm

One way the venture capital firm avoids the free-rider problem is by




A. Prohibiting the sale of equity in the firm to anyone except the venture capital firm


B. Prohibiting members from serving on the board of directors


C. Prohibiting the borrowing firm from replacing management


D. Requiring collateral equal to the value of the borrowed funds

Prohibiting the sale of equity in the firm to anyone except the venture capital firm

Debt contract




A. Are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals


B. Are used less frequently to raise capital than are equity contracts


C. Never result in a loss for the lender


D. Have a higher cost of state verification than equity contracts

Are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals

Which of the following correctly lists a procedure used to reduce asymmetric information problems as well as the type of asymmetric information problem it reduces




A. Monitoring is used to reduce adverse selection


B. Covenants are used to reduce moral hazard


C. Screening is used to reduced moral hazard


D. All of the above correctly list a procedure and the type of problem it reduces




Which of the following is true about techniques used to reduce asymmetric information problems?




A. Screening is used before the transaction; monitoring is used after the transaction


B. Monitoring is used before the transaction; screening is used after the transaction


C. Both screening and monitoring are used after the transaction


D. Both screening and monitoring are used before the transaction

Covenants are used to reduce moral hazard




Screening is used before the transaction; monitoring is used after the transaction

Bonds account for a larger fraction of external funds relative to equities raised by American businesses because:




A. Costly state verification makes the equity contract less desirable than the debt contract


B. Equity contracts do not permit borrowing firms to raise additional funds by issuing debt


C. Of the reduced scope for moral hazard problems under equity contracts as compared to debt contracts


D. There is no moral hazard problem when using a debt contract

Costly state verification makes the equity contract less desirable than the debt contract

A debt contract is incentive compatible




A. If the borrower's net worth sufficiently low so that the lender's risk of moral hazard is significantly reduced


B. If the lender has the incentive to behave in the way that the borrower expects and desires


C. If the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's worth in the business


D. If the debt contract is treated like an equity

If the borrower has the incentive to behave in the way that the lender expects and desires, since doing otherwise jeopardizes the borrower's worth in the business

For restrictive covenants to help reduce the moral hazard problem they must be ______ by the lender




A. Written in all capitals


B. Impossible to remove


C. Monitored and enforced


D. Easily Changed

Monitored and enforced

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




A. Too many resources may be devoted to monitoring and enforcing them, as debt holders duplicate others' monitoring enforcement efforts


B. Borrowers may find loopholes that make the covenants ineffective


C. They are inexpensive to monitor and enforce


D. They reduce the value of the debt contract

Borrowers may find loopholes that make the covenants ineffective

One reason financial systems in developing and transition countries are underdeveloped is




A. the accounting standard are too stringent for the banks to meet.


B. they have weak links to their governments


C. The legal system may be poor making it difficult to enforce restrictive covenants


D. They make loans only to nonprofit entities

The legal system may be poor making it difficult to enforce restrictive covenants

Deposit insurance is designed to (increase or decrease) fears of bank runs and therefore (increase or decrease) confidence in banks and deposits




However, because depositors may feel that the "safety net" of deposit insurance means they no longer need to supervise banks themselves, asymmetric information in the form of
(moral hazard or adverse selection) may (increase or decrease)

Decrease, increase




Moral hazard and increase

Debt contracts




A. are used more frequently to raise capital than are equity contracts


B. Have a higher cost of state verification than equity contract


C. Never result in a loss for the lender


D. are informal agreements between borrowers and lenders

are used more frequently to raise capital than are equity contracts

Of the following sources of external finance for American non-financial businesses, the most important is;




A. Loans from banks


B. Stock market shares


C. Loans from other financial intermediaries


D. Bonds and Commercial paper

Loans from other financial intermediaries



The _____ problem helps to explain why the private production and sale of information cannot eliminate asymmetric information




A. Free Rider


B. Adverse selection


C. Principal-agent


D. Moral Hazard

Free Rider



Which of the following describes the 'lemons problem' as an example of asymmetric information?




A. Buyers have more information than sellers and more transactions occur


B. Buyers have less information than sellers and few transactions occur


C. Sellers have less information than buyers and few transactions occur


D. Sellers have more information than buyers and more transactions occur

Buyers have less information than sellers and few transactions occur

Regulation of the financial system




A. occurs only in the US


B. adds to the stability of the financial system


C. Protects the jobs of employees of financial institutions


D. Protects the wealth of owners of financial institutions

Adds to the stability of the financial system

The structure of financial markets is the result of:




A. adapting to continually changing government regulations


B. Regulating the great number of small firms in the United States


C. Attempting to cartelize the provision of financial services


D. Attempting to reduce transaction costs



Attempting to reduce transaction costs

Asymmetric information in equity contracts is known as the ______ problem because the manager of the firm has fewer incentives to maximize profits than the stockholderrs might ideally prefer




A. adverse selection


B. debt inflation


C. free-rider


D. principal-agent

principal agent

The inequality of information between borrowers and lenders in financial markets is broadly known as:




A. asymmetric information


B. non-collateralized risk


C. adverse selection


D. moral hazard



Asymmetric Information



Why are financial markets regulated




A. Financial markets are regulated to increase competition among financial institutions


B. Regulation guarantees that the maximum rates of return are earned on various financial instruments


C. Regulation defines the standards for providing information to shareholder, depositors, and the public

Regulation defines the standards for providing information to shareholder, depositors, and the public

The principal-agent problem




A. Is not related to asymmetric information


B. Occurs because owners have incomplete information about the motives and behavior of managers


C. is a type of adverse selection


D. Eliminates costly state verification



Occurs because owners have incomplete information about the motives and behavior of managers

Which of the following is benefit to an individual purchasing a mutual fund




A. Diversification


B. Increased Risk


C. An opportunity to free ride


D. Higher transaction costs



Diversification

The free-rider problem:




A. will make more people willing to provide information services


B. Will only occur if information costs are zero


C. Makes it easier for an investor to continue to buy securities at less than the true value


D. Results from the production of information being much like a public good where exclusion is not possible

Results from the production of information being much like a public good where exclusion is not possible

Which of the following statements concerning external sources of financing for non-financial businesses in the United States is true?




A. Bonds are a far more important source of financing than are stocks


B. Stocks and bonds combined supply more than one-half of the external funds


C. Since 1970, more than half of the new issues of stock value have been sold to American households


D. Financial intermediaries such as banks are the least important source of external funds for businesses

Bonds are a far more important source of financing than are stocks

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




A. adverse selection; moral hazard


B. free riding; costly state verification


C. Moral hazard; adverse selection


D. Costly state verification; free riding

Moral hazard; adverse selection

Because of the adverse selection problem:




A. Lenders will write debt contracts that restrict certain activities of borrowers


B. good credit risks are more likely to seek loans, causing lender to make a disproportionate number of loans to good credit risks


C. bad credit risks with a willingness to pay higher interest rates will be the majority seeking loans

bad credit risks with a willingness to pay higher interest rates will be the majority seeking loans

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




A. there is no moral hazard problem when using a debt contract


B. costly state verification makes the equity contract less desirable


C. Equity contracts do not permit borrowing firms to raise additional funds by issuing debt



costly state verification makes the equity contract less desirable