ECON 3703 -X30 ch7-10

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when ____ was security of the treasury he argued for ____

Alexander Hamilton; a central bank

the foreign city with the most U.S. banks is

London

famous entrepreneur and "lifestyle advise" _____ was found guilty of ___

Martha Stewart; insider trading

the largest provider of loans from the federal family education loans program is

Sallie mae

the process of transforming loans into securities is called

Securitization

firms that overissue new stocks could be accused of selling

a "lemon"

consequences of the adverse selection problem in securities markets include

a decrease in the overall number of good- quality securities issued

to encourage long term relationships with good borrowers, banks often offer

a line of credit

traditional mortgager require _____ while many subprime mortgages were offered with ______

a substantial down payment; "zero down"

banks are reluctant to lend to borrowers with weak credit histories because of ___ they rely on ____ to reduce this problem

adverse selection; credit reports

the minimize the problem of _____ before purchasing a stock you should _____

adverse selection; gather information about the firm whose stock you are interested I

because of ____ banks prefer to develop _____ with customers

adverse selection; long term relationship

credit ratings reduce

adverse selections

applying the principal agent terminology to financial markets firms are the ____ and savers the _____

agents; principals

banks strategies designed to solve moral hazard problem include A. setting net worth requirements B. including restrictive covenants C. monitoring borrowers' activities D. all of these are strategies

all fo these are strategies

banks often merge A. after they have suffered large losses B. to create an empire for the bank managers C. to avoid failure D. all of the answers are correct

all of the answers are correct

screening fo home mortgages relies most heavily on A. debt income ratio B. collateral C. credit scores D. all of the answers are correct

all of the answers are correct

subprime lenders include A. pawnshops B. finance companies C. title loan companies D. all of the answers are correct

all of the answers are correct

the U.S. government encourages home ownership by A. guaranteeing mortgages B. providing tax breaks C. supporting Fannie Mae and Freddie Mac D. all of the answers are correct

all of the answers are correct

to minimize moral hazard many banks require A. collateral B. compensating balances C. compensating balances D. all of the answers are correct

all of the answers are correct

methods to reduce information asymmetries include using A. information gathering firms B. boards of directors of publicly traded companies C. private equity are methods D all of these are methods

all of these are methods

when buyers have less information than sellers do about the quality of the product, a situation of _____ exists

asymmetric information

because of the McFadden Act, each state had its own:

banking industry

the adverse selections problem helps to explain why sometimes firms issue ___ rather than ____

bonds; stocks

money- coveter banks finance their lending primarily through

borrowing from other banks

the two main types of banks are

commercial and thrifts

which of the following statements about community banks in the United States is true

community banks have a niche in small business lending

banks that are considered too big to fall

could disrupt the entire financial system if allowed to fall

which of the following statements about the Sarbanes Oxley act is true

it established the accounting oversight board to monitor the performance of corporations auditors

when banks made loans, they traditionally ____; in recent years, they have _____ the loans.

kelt the loan on their own books; securitized

____ firms buy an entire company, make it profitable, and then resell it after a few years

takeover

the U.S. government encourages homeownership by

tax incentives

which of the following act, forbade banks to operate in more than one state?

the McFadden act 1972

which of the following statements about the SEC is true

the SEC requires that firms that issue securities disclose information to buyers of their securities

the country with the largest number of banks is

the United States

the sarabands - Oxley act created _____ to monitor accounting auditors performance

the accounting oversight board

transaction costs are defined as

the costs in time and money of exchange

reasons why indirect finance is so important include

the fact that banks provide liquidity to depositors

because gathering information is costly, when many people buy the same stock ______ arieses

the free rider problem

which of the following statements about a Ponzi scheme is true

the schemer sends clients faces statements showing that their wealth is increasing

banks are careful at screening protectional borrowers because they are

the sole recipient of the benefits of loans

which of the following statements about regional and super regional banks is true

the super regional bank operates across most of the United States

which of the following statements about money centers banks is true

their headquarters are located in a major financial center

which of the following are among the "five Ps" pf business lending

there is no such thing as the "fives Ps' of business lending

characteristics of payday lenders include which o the following

they change very high interest rates

which of the following statements about community banks is true?

they usually raise funds from local depositors and lend to consumers and small business

which of the following allowed Fannie Mae and Feddie Mac to pay relatively low interest on their bonds

they were implicitly backed by the U.S. government

as a result of the subprime lending crisis what happened to Fannie mea and Freddie mac

they were sold to a foreign central bank

which is the preferred method used by loan sharks to deal with default risk

threat of appropriate violence

which of the following statements about thrifts institutions is true?

thrifts are divided into credit unions and savings institutions

when a small firm borrows from a commercial bank instead of an investment bank it reduces its

transaction costs

eurodollars are

units of foreign currency

_____ firms buy ownership shares (ie a substantial share) in a new company which is used to finance the company's expansion

venture capital

community banks have less than ____ in assets

$1 billion

suppose that you have the same amount of information as the firms that are trying to raise funds to invest in a project. your firm can issue a $100 bond that promises to pay 25 precent in a year. suppose there are two firms that are trying to rise funds to pay for a project. firm A's project is safe and is guaranteed to produce $130 in revenue. firm B's project is risky and has a two-thirds probability of producing $180 a year, and a one-third chance it produces nothing. what is the expected return on each project, and which firm will receive financing

$130; $120; firm A

in akeriof's "lemons" model which of the following completes the following sentence? because all used cars in the market are priced based on the average quality of all cars 1. owners of high- quality cars are not willing to sell their cars 2. owners of poor- quality cars want to sell their cars 3. buyers will only have access to high quality cars

1 & 2

to reduce moral hazard after buying a stock or bond, individual savers should examine a firms: 1. past earnings 2. future projects 3. managers

2 and 3

by 207 over ____ of all mortgages were securitized

25 percent

according to a study by economists at Harvard and the University of Chicago stock markets activity is highest with _____ legal systems

English

which of the following deposits are called eurodollars

dollars deposited in a foreign branch of chase Manhattan located in Paris

banks can offer small firms smaller transaction costs because of

economies of scale

when banks merge they benefit from _____ which reduces _____

economies of scale; transaction costs

one of andrew Jacksons primary goals when elected president was to

eliminate the second bank of United States

finance companies are not as heavily regulated as commercial banks which enables them to make subprime loans reasons for this light regulation includes which of the following

finance companies do not accept deposits

if a large number of savers ant to buy a certain stock, they should each contribute to the cost of ______ however they likely won't. this is called _____

gathering information; the free- ride problem

the result of the populists belief that risky bank behavior helped cause the great depression was the

glass steagall act

a bank charter is a

government license to operate a bank

the creations of the financial holding company Citigroup was made possible by the passage of the

gramm- leach billy act

which of the following statements about international banking is true

hundreds of foreign banks new have subsidiaries in the United States

because a large part of Enron's managers pay was ___ there was an incentive to ____

in stock options; lie about losses

securitization benefits for banks include

increased liquidity

in securities markets, we can see evidence for the free rider problem because

individuals savers can observe others actions and do the same

the government abolished the ____ program in 2010 in favor of a ____ program to reduce the governments cost to help students finance their education

loan guarantee; Stafford loan

recipients of Stafford student loans receive their funding form one of two different programs

lord direct loan program or federal family education loan program

savings institutions focus primarily on

making home mortgage loans

George mason university economist gordon bullock once suggested that to make people drive more safely automobile manufactures should put a spike in the middle of the steering wheel. this is one way to getting rid of

moral hazard

when seatbelts became mandatory by law, the number of accidents increased; this is likely due to

moral hazard

hostile takeover reduces ____ because if a company is poorly managed here is an incentive to ____

moral hazard; changes things

suppose you take out a loan to buy a small plane for your aerial sightseeing company and you pledge the plane as collateral when the bank requires that the plane cannot be used in acrobatic competitions it is effectively including a ____ in the loan contract

negative covenant

the financial crisis of 2007- 2009 led to

new regulations designed to limit risk taking by banks

the adverse problem arises because

of asymmetric information

a private equity firm is a financial institution that

owns large shares in private companies

subprime lenders include

pawnshops

companies that make small loans to people who need cash urgently are called

payday lenders

which of the following statements about banks and transactions costs is true

small savers resort to banks because of the benefit of liquidity and the low cost of acquiring assets

the interest rate offered by banks to heir highest quality borrowers is called the

prime rate

the moral hazard problem in stock markets, in which _____ fear that managers will misuse their funds, makes it ______ for firms to raise funds by selling stocks

principals; harder

money center banks largest loans are to

private equity firms take over companies

you have $100 and are thinking about how you might go about saving it. you pick up the Wall Street journal and see the following information; a project that pays $125 with a probability of 0.75, or it pays $75 a project that pays $200 with a probability of o.25 or it pays $50 alternatively, you could put the $100 in a CD account and earn $110 at the end of the year, which strategy would be most advantageous to you? and if you put it into action how much would you take home?

project a: $112.50

the rating argue that their opinions are

protected by the first amendment

in 2008 the federal government ___ Fannie Mae and Freddie Mac

put into conservatorship

one of the securities and exchange commissions main goals is to

reduce information asymmetries

SEC effects are mainly aimed at

reducing insider trading and increasing the flow of information in financial markets

Banks mitigate moral hazard by

requiring borrowers to have collateral

a credit union is different from a savings and loan because it

restricts membership to common group of people

the ___ act restricts banks from holding more than _____ precent of all commercial banks deposits

riegle-neal; 10

in direct finance

savers buy securities from investors in financial markets

when conflicts of interest arise in the bond-rating industry

savers can potentially lose lose a lost of money

banks mitigate adverse selection by

secreting potential borrowers

the Gramm-leach billy act which fully repealed the ____ was passed in 1999

separation of commercial banks and securities firms


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