Money and Banking practice exam 1
Which of the following is likely to occur if the stock market has been rising slowly?
Firms will sell less newly issued stock
In the liquidity preference framework, interest rates are determined by the supply and demand for _____ Refer to the figure on your right. Suppose that there is a higher level of income due to a business cycle expansion. 1.) Use the line drawing tool to show the shift of the money demand or the money supply. Use the liquidity preference framework. Carefully follow the instructions above, and only draw the required objects.
Money Shift Md2 upward
Which of the following is an example of a money market instrument?
U.S. government treasury bill with six months to maturity
Money may serve as an instrument that allows for comparison of the relative worth of various goods and services. What function of money does this describe?
Unit of account
The currency of the United States is said to be ______ when the exchange rate for the U.S. dollar falls and it costs more dollars to purchase another country's currency.
Weaker
How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?
When lending to a person the information is provided may not be absolutely perfect or the information about the borrower may no be verified perfectly which is called asymmetric information.Due to the existence of asymmetric information, a banker/lender faces the rrisk of adverse selection. Because you know your family member better than a stranger, you know more about the borrower's honesty, propensity for risk taking, and other traits. There is less asymmetric information than with a stranger and less likelihood of an adverse selection problem, with the result that you are more likely to lend to the family member.
Which of the following statements is not true? According to the segmented markets theory of the term structure of interest rates, if bondholders prefer short-term bonds to long-term bonds, the yield curve will be _____
When short-term interest rates are low, yield curves tend to be inverted Upward sloping
Find the price of a 20.00% coupon bond with a face value of $2000, a 16.00% yield to maturity, and 5 years to maturity. PV = Price of the bond = $ ____ (Round your response to two decimal places.) (have picture in camera roll)
X = .16 * 2000 [1- (1 + .20)^-5/.20] + 2000/(1 +.16)^5 = 2261.94
Interest rates have been at 6% for the past four years. The economy goes into a recession causing the Fed chairperson to announce an expansionary monetary policy with an interest rate target of 2.5%. You forecast interest rates for next year to be 6%. This is an example of applying the theory of _______
adaptive expectations
The 'lemons problem' in used car markets causes:
all high-quality vehicles to be driven out of the market
In prison, cigarettes are sometimes used among inmates as a form of payment. All of the following explain how cigarettes solve the "double coincidence of wants" problem, even if a prisoner does not smoke, except:
exchanging cigarettes for other goods and services increases transaction costs.
Banks, savings and loan associations, mutual savings banks, and credit unions:
have been adept at innovating in response to changes in the regulatory environment.
Along the supply curve for bonds, a decrease in the price of bonds:
increases the interest rate and decreases the quantity of bonds supplied
Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons except:
information symmetries
_________ are institutions that borrow from people who have saved and then lend to others. Which of the following are the largest financial intermediaries in the U.S. economy?
-Financial intermediaries -Banks
How does a fall in the value of the pound sterling affect British consumers? A fall in the value of the pound will cause American businesses to be
-Foreign goods are now relatively more expensive; British consumers are hurt -Worse off
The ________ is the cost of borrowing or the price paid for the rental of funds expressed as a percentage per year. The chief financial officer (CFO) of a large corporation that wishes to borrow $100 million to construct a factory in the United States should use the _____ market.
-Interest rate -Bond
In September 2008, the growth rate of the M1 money supply was zero, while the growth rate of the M2 money supply was about 5%. In July 2009, the growth rate of M1 was about 17%, and the growth rate of M2 was about 8%. When interpreting changes in the growth rates of M1 and M2, Federal Reserve policymakers should recognize:
-an inflationary problem may exist in the future as the growth of M1 to 17% is alarmingly high. -the growth rate of M2 should be higher than the 3% increase shown over this period.
Using the figure above, if inflation is lower in Canada than in the United States, it is likely that:
...
The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Use the table to calculate the liquidity premium for each multiyear bond. Year 1 2.00%. 2.00% Year 2 3.00%. 3.00% Year 3. 6.00%. 5.00% Year 4. 9.00%. 6.00% Year 5. 11.00%. 7.00% The liquidity premiums for each year are given as: (Enter your responses rounded to two decimal places.) /11 = /21 = /31 = /41 = /51 =
/11: 2-2/1 = 0% /21: 3-[2+3/2] = .50% /31: 4-[6+3+2/3] = 1.33% /41: 7-[9+6+3+2/4] = 1.00% /51: 8-[11+9+6+3+2/5] = .80%
Suppose that you are the manager of a bank that has $15 million of fixed-rate assets, $30 million of rate-sensitive assets, $25 million of fixed-rate liabilities, and $20 million of rate-sensitive liabilities. Conduct a gap analysis for the bank, and show what will happen to bank profits if interest rates rise by 5 percentage points.
0.5 million
Rate-Sensitive Bank Assets. Variable-rate Loans $5 Short-term Loans. 10 Short-term Securities. 15 Reserves. 10 Long-term Loans. 30 Long-term Securities. 30 Liabilities Variable-rate CDs. $30 Money Market ___ Deposit Accounts. 20 Checkable Deposits 10 Savings Deposits 10 Long-term CDs 20 Equity Capital. 10 Referring to the table above, and using basic gap analysis, this bank's "gap" is $nothing million. (Round your response to the nearest whole number.) Referring to the table above, if interest rates suddenly increase by two percentage points, then the bank's profits change by $nothing. (Round your response to the nearest whole number.) Referring to the table above, if, instead, interest rates suddenly decrease by three percentage points, then the bank's profits change by $nothing. (Round your response to the nearest whole number.)
20 million -400,000 -600,000 (not sure how)
Using the numbers 1, 2, 3, and 4, rank the following four assets from most liquid (1) to least liquid (4). A 10,000-square-foot office building nothing ___ $2,000 in cash nothing ____ A $10,000 Treasury bill ____ 100 shares of Google stock ____
4 1 2 3
Match (by number) each concept with its description: Adverse selection Asymmetric information Moral hazard
AS- Occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcome—the bad credit risks—are the ones who most actively seek out a loan and are thus most likely to be selected. AI- A situation where one party often does not know enough about the other party to make accurate decisions. MH- A situation where the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back.
Concept Adverse selection Asymmetric information Moral hazard
AS: Occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcome—the bad credit risks—are the ones who most actively seek out a loan and are thus most likely to be selected. AI: A situation where one party often does not know enough about the other party to make accurate decisions. MH: A situation where the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back.
A strong dollar implies that
American consumers can afford more foreign goods.
Suppose that a bond has one year to maturity. The yield to maturity on the bond if it was bought for $1080.00 and has a $1200 face value with a coupon rate of 11% is:
Annual coupon: $1200 * 11%= 132 YTM: (1200 + 132 - 1080.00)/1080.00 =.23 or 23%
Consider a coupon bond with a face value of $1050, one year to maturity, and a coupon rate of 10%. Given a yield to maturity of 7%, the price the bond will sell for is:
Annual income: 1050 * 10%= 105 YTM = 7% = 0.07 Bond price: P = 105 / (1 + 0.07)^1 + 1200 / (1 +0.07)^1 =1079.44
Unexploited profit opportunities:
Are quick to disappear
The largest source of external finance for U.S. businesses is ____ In which country among the United States, Germany, Japan, and Canada do firms use bonds to the greatest degree when compared to the firms of the other countries?
Bank and nonbank loans United States
Why might a bank be willing to borrow funds from other banks at a higher rate rather than borrow from the Fed?
Borrowing from the Fed might invite greater supervisory scrutiny from the central bank.
______ are agents for investors who help match buyers with sellers of securities while
Brokers
Financial Intermediary Commercial Bank Savings and Loan Credit Union Mutual Fund
CB: These financial intermediaries raise funds primarily by issuing checkable deposits, savings deposits, and time deposits. They then use these funds to make commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds. SL: These depository institutions obtain funds primarily through savings deposits (often called shares) and time and checkable deposits. In the past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing. CU: These depository institutions obtain funds primarily through savings deposits (often called shares) and time and checkable deposits. In the past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing. MF: These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.
Money market instrument Commercial paper Treasury bills Repurchase agreements Federal funds Banker's acceptances
CP: A short-term debt instrument issued by large banks and well-known corporations. TB:These short-term debt instruments of the US government are issued in three-, six-, and 12-month maturities to finance the federal government. PA:These instruments are effectively short-term loans (usually with a maturity of less than two weeks) for which Treasury bills serve as collateral, which the lender receives if the borrower does not pay back the loan. FF:These instruments are typically overnight loans between banks of their deposits at the Federal Reserve. BA:These money market instruments are created in the course of carrying out international trade. This is a bank draft (a promise of payment similar to a check) issued by a firm, payable at some future date, and guaranteed for a fee by a bank.
Consider a coupon bond that has a par value of $900 and a coupon rate of 5%. The bond is currently selling for $844.21 and has 2 years to maturity. What is the bond's yield to maturity (YTM)? The yield to maturity is ____% (Round your response to one decimal place.)
Coupon payment each year = 5% * 900 = $45. So, the equation would be, 844.21 = 72/(1+i) + 72/(1+i)2 + 900/(1+i)2 i = 0.085 = 8.5%. So, the yield to maturity is 8.5% .
______ are those who buy and sell securities at a specified price for buyers and sellers.
Dealers
Which of the following is a benefit to an individual purchasing a mutual fund?
Diversification
_____ are foreign currencies deposited in banks outside the home country.
Eurocurrencies
______ are dollar-denominated deposits in foreign banks that are outside the United States or in foreign branches of U.S. banks.
Eurodollars
Financial market Foreign bonds Eurocurrency Eurodollars Eurobonds
FB: Bonds sold in a foreign country and denominated in that country's currency. EC: Foreign currencies deposited in banks outside the home country. ED: US dollars deposited in foreign banks outside the United States or in foreign branches of US banks. EB:A bond denominated in a currency other than that of the country in which it is sold—for example, a bond denominated in US dollars sold in London.
Regulatory Agency Federal Reserve FDIC Office of Thrift Supervision Comptroller of the Currency SEC
FR: Examines the books of commercial banks that are members of the Federal Reserve System and sets reserve requirements for all banks FDIC: Provides insurance of at $250,000 for each depositor at a bank, examines the books of insured banks, and imposes restrictions on assets they can hold. OTS: Examines the books of savings and loan associations and imposes restrictions on assets they can hold. CC: Charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold. SEC: Requires disclosure of information of financial instruments traded in organized exchanges.
If expectations of future short-term interest rates suddenly fall, what would happen to the slope of the yield curve? The yield curve would become _______
Flatter
Match each capital market instrument with its description: Government Security Stocks Agency Securities Corporate Bonds Mortgages
GS - These long-term debt instruments are issued by the U.S. Treasury to finance the deficits of the federal government. S - These are equity claims on the net income and of a corporation. AS - These long-term bonds are issued by institutions such as Ginnie Mae, the Federal Farm Credit Bank, and the TVA. Many of these securities are guaranteed by the federal government. CB - These long-term bonds are issued by corporations with very strong credit ratings. M - These are loans to households or firms to purchase housing, land, or other real structures, where the structure or land itself serves as collateral for the loans.
Announcements of unknown information:
Generate unexploited profit opportunities
People in the United States in the nineteenth century were sometimes willing to be paid by cheque rather than with gold, even though they knew that there was a possibility that the cheque might bounce. Which of the following would represent an advantage of gold over cheques as a form of money?
Gold has intrinsic value when compared to cheques
Suppose a change in the way a variable moves such that it is much larger than before. If adaptive expectations accurately represent how people form expectations, then the difference between the variable and its expected value is ______
Greater than zero
According to the efficient market hypothesis, in order to earn abnormally high returns, an investor would need to _____
Have exclusive information
If you read in the Financial Times that the "smart money" on City expects stock prices to fall, should you follow that lead and sell all your stocks?
If in financial times the news would come that the "smart-money" on City expects stock price to fall, i would not blindly follow the advice and sell my stocks. I would try to underdstand the reason for depleting of the stock price that they are speculating. If the reason seems to be temporary which can last only for few quarters or based on same rumors i will wait for the actual news to come up. As long as fundamentals of the company is not compromised i won't be exiting from the stock.Another reason for not exiting from the stock based on this news if fundamentals of the company are intact is, because viewership of the news article is quite huge so smart money would have exited prior to this and weightage of this news would have been factored in the stock prices prior to it, because market is always forward looking. Based on technical analsysis we can confirm whether it was factored in or not. Only exception to above rule is when fundamental of the company is compromised, in this case we can sell on any rise.
If a yield curve looks like the one shown in the figure to the right, what is the market predicting about the movement of future short-term interest rates? The market is predicting that future short-term interest rates will ______ What might the yield curve indicate about the market's predictions for the inflation rate in the future? The market's predictions indicate that inflation will be _______ in the future
Increase higher
The _____ is the cost of borrowing or the price paid for the rental of funds expressed as a percentage per year. The chief financial officer (CFO) of a large corporation that wishes to borrow $100 million to construct a factory in the United States should use the ______ market.
Interest rate Bond
How might a sudden increase in people's expectations of future real estate prices affect interest rates?
Interest rates would increase because real estate would have a relatively higher rate of return compared to bonds, which would cause the demand for bonds to decrease.
_____ are firms that assist in the initial sale of securities in the primary market.
Investment Banks: underwrite securities. They guarantee a price for a corporation's securities and then sell them to the public.
'Anytime it is snowing when Joe Commuter gets up in the morning, he misjudges how long it will take him to drive to work. When it is not snowing, his expectations of the driving time are perfectly accurate. Considering that it snows only once every ten years where Joe lives, Joe's expectations are almost always perfectly accurate.' Are Joe's expectations rational? Why or why not?
It has been provided that whenever it snows, commuter Joe misjudges the time he will take to drive to work. This phenomena occurs every time when it snows. However, when it is not snowing, Joe judges the time he will take to drive to work in perfectly accurate manner. So, it has been stated that Joe's expectations are almost always perfectly accurate. Rational expectation theory states that person form expectation based on all the available information, his past experiences. Expectations formed in this manner are referred to as optimal expectations. Since, past experiences shows that Joe is not able to judge correctly the time to drive to work when it snows. So, in future, when he forms expectations with respect to time he will take to drive to work when it snows, he must take into account his past mis judgments as well as forecast with respect to snowfall. This will help him in improving his expectations and can achieve optimal expectations. As he is not taking into account past experiences in correct manner and there is chance to improve expectations, the Joe's expecations are not rational.
Which agency has regulatory responsibility when a bank operates in many different countries?
It is not always clear.
Which of the following is not a characteristic of an effective commodity money?
It should be able to be easily reproduced by everyone in the economy.
Using the figure above, we find that low growth rates in the money supply are most likely associated with a:
Low rate of inflation and low long term rates
For each of the following assets, indicate which, if any, of the monetary aggregates includes them: a. Currency b. Money market mutual funds (noninstitutional) c. U.S. T-bills (with maturities of less than 90 days) d. Small-denomination time deposits e. Large-cap mutual funds f. Checkable deposits
M1 and M2 M2 Only Neither M1 nor M2 M2 only Neither M1 nor M2 M1 and M2
Which of the following is a main responsibility of the bank manager?
Maintaining reserves at a level to minimize the cost to the bank of deposit outflows.
Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emphasized. Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she can use that money to buy goods and services. In this case, money is being used as a _____________ Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per pound of each of these goods quoted in currency units. In this case, money is being used as a ______________ Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account. In this case, money is being used as a ______________
Medium of exchange Unit of account Store of value
As a bank, you make a loan to an individual seeking funds to open a coffee shop. When the loan is made, the borrower uses the funds to take a vacation to Greenland. This is an example of
Moral hazard
Would you be more or less willing to buy gold under the following circumstances: Gold again becomes acceptable as a medium of exchange. Prices in the gold market become more volatile. You expect inflation to rise, and gold prices tend to move with the aggregate price level. You expect interest rates to rise.
More willing Less willing More willing More willing
For every $1,000 of annual income, households maintain average cash balances (their demand for money) of $200. How will growth in GDP affect interest rates, holding the money supply constant? Use the liquidity preference framework 1.) Using the line drawing tool, show the effect of growth in GDP using the liquidity preference framework. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium interest rate and quantity of money. Label the point '2'. Carefully follow the instructions above, and only draw the required objects.
Move Md2 upward Add a point (2)
Which of the following statements is true?
Only a coupon bond can have a negative nominal interest rate.
Match each financial market with its description: Primary Market Capital Market Money Market Secondary Market Debt Market
PM - A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. CM - A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded. MM - A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded. SM - A financial market in which securities that have been previously issued can be resold. DM - A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded.
Financial market Primary market Capital market Money market Secondary market Debt market
PM:A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds. CM:A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded. MM:A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded. SM:A financial market in which securities that have been previously issued can be resold. DM: A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded.
How much would you pay for a perpetual bond that pays an annual coupon of $50 per year and yields on competing instruments are 20%? You would pay $______ . (Round your response to the nearest penny.) If competing yields are expected to change to 8%, what is the current yield on this same bond assuming that you paid $250? The current yield is _____%. (Round your response to the nearest integer.) If you sell this bond in exactly one year, having paid $250, and received exactly one coupon payment, what is your total return if competing yields are 8%? Your total return is ____%. (Round your response to two decimal places.)
Price: 50/20% or .20 = 250 Current Yield: 50/250 = 0.2 = %20 Price of bond after year 1: 50/.08 = 625 Total return: (625 + 50)-250/250 = 1.7 or 170%
Which of the following is a disadvantage of using fiat money?
Public authorities may be tempted to produce too much of it
The population and real GDP for the United States is shown in the table below. Use it to answer the following questions. YEAR US POPULATION (in millions) Real GDP (2000) (in billions) 2001 286 $9,900 2002. 289. $10,098 2003 293 $10,401 2004. 296 $10,609 The real GDP per capita for 2002 is $_____(Round your response to the nearest dollar.) The real GDP per capita for 2003 is $_____ (Round your response to the nearest dollar.) The growth rate of real GDP per capita from 2002 to 2003 is _____%. (Round your response to two decimal places.)
Real GDP per capita = Real GDP / Population 2002: $10,098 Billion / 289 million = $10,098,000 Million / 289 Million = $34,941 2003: $10,401 Billion / 293 million = $10,401,000 Million / 293 million = $35,498 Growth rate = ($35,498 / $34,941) - 1 = 1.59%
The figure depicts the market for short-term bonds. Suppose uncertainty about the future will lead investors to move to the short end of the market. (Assume this shock only affects the demand for short-term bonds) Using the line drawing tool, show the effect of this shock on the short-term bond market. Properly label your line. Carefully follow the instructions above, and only draw the required object. As a result, the difference between short-term and long-term bond yields will ________
Shift Bd2 upward Will increase
The figure to the right depicts the bond market. Explain the effect that a large federal deficit will have on interest rates. 1.) Using the line drawing tool, show the effect of this shock on the bond market. Properly label your line. 2.) Using the point drawing tool, indicate the new equilibrium bond price and quantity. Label the point '2'. Carefully follow the instructions above, and only draw the required objects. The effect of this shock will likely cause interest rates to ______
Shift Bs2 downward Add a point (2) INCREASE (unsure)
Foreign exchange rates, like stock prices, should follow a random walk because changes in the exchange rate are unpredictable.
TRUE
The spread between the interest rate on a one-year U.S. Treasury bond and a 20-year U.S. Treasury bond is known as the ______ According to the expectations theory of the term structure of interest rates, if the one-year bond rate is 3%, and the two-year bond rate is 4%, next year's one-year rate is expected to be _______
Term premium 5 % (As the expectations are increasing by 1% each in every year , the next one rate rate will be expected at 5%)
In December 2001, Argentina announced it would not honor its sovereign (government-issued) debt. Many investors were left holding Argentinean bonds priced at a fraction of their recent value. Which of the following correctly summarizes the situation in Argentina as described above?
The risk on Argentinean debt rose, its yield rose, and its price fell.
Why is simply counting currency an inadequate measure of money?
There are other liquid assets similar to currency that can be used as money to purchase goods and services.
What is the main disadvantage of moving to e-money or moving to a cashless society?
There are problems with security and privacy
Why do stock market events like October 1987 or the technology crash of 2000-2001 cast doubt on the efficient market hypothesis?
There may be unexploited profit opportunities in these events
When interest rates decrease, how might businesses and consumers change their economic behavior?
There will be more consumption spending on interest-sensitive items and more investment by businesses.
Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. What function do financial intermediaries perform?
They provide a channel for linking those who want to save with those who want to invest.
Why is being nosy a desirable trait for a banker?
To reduce moral hazard, a banker must continually monitor borrowers to ensure that they are complying with restrictive loan covenants A banker has to screen out good credit risks from bad credit risks A banker determines credit risk by learning as much as possible about potential borrowers (all of the above are correct)
Real GDP is computed by adjusting nominal GDPfor:
changes in the price level
Which of the following forms of payment is least efficient because it generates the highest transactions costs?
commodity money
In a given year, corporations raise the greatest amount of funds through which of the following instruments?
corporate bonds
Which of the following instruments pays the holder of the instrument a fixed interest payment every year until maturity, and then at maturity pays the holder the face value (principle) of the instrument?
coupon bond
A discount bond will have a negative nominal interest rate when the:
current bond price is greater than its face value.
Restrictive covenants
make debt contracts more incentive compatible.
Financial markets perform the basic function of:
matching savers with funds to lend to people who want to borrow funds
Problems created by asymmetric information after the transaction occurs is called ________, while the problem created before a transaction occurs is called ________.
moral hazard; adverse selection
A decrease in the value of the dollar relative to foreign currency implies that
more foreigners will want to purchase U.S. goods
A strong U.S. dollar means that U.S. goods exported abroad will cost:
more in foreign countries and foreign goods imported will cost less in the United States.
There are many faults associated with adaptive expectations except that:
past data do not help predict future values of variables.
Assuming the terms of issuance to be the same for different types of loans, a government would choose to issue a:
perpetuity.
If stock market prices are falling, then more people feel
poorer
Which of the following is an example of a restrictive covenant in a debt contract?
requiring borrowers to have life insurance
When investors are involved in trading activities in an attempt to outguess markets, investors are:
speculating
If the price of bonds is above the equilibrium price, there occurs an excess
supply of bonds, the price of bonds will fall and the interest rate will rise
The national debt of the United States is best defined as:
the accumulated federal budget deficits and surpluses since the nation's beginning.
The foreign exchange rate is:
the price of one country's currency in terms of another country's currency
Financial markets improve economic welfare because:
they allow consumers to time their purchases better AND they channel funds from savers to investors
Large-denomination CDs are ________, so that like a bond, they have a ________degree of liquidity and can be sold in secondary markets.
negotiable; greater
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.
principal-agent
