Chapter 11 - McGraw hill

Which of the following is true? Multiple choice question. 1. Adverse selection and asymmetric information are two obstacles presented by moral hazard. 2. Moral hazard and adverse selection are two obstacles presented by asymmetric information. 3. Moral hazard and asymmetric information are two obstacles presented by adverse selection.

2. Moral hazard and adverse selection are two obstacles presented by asymmetric information.

Which of the following is not a method used to reduce moral hazard?

Credit screening -is only appropriate for adverse selection problems, since both take place before the loan is made.

Which of the following states is true as it relates to financial systems?

Credit to the private sector and GDP are positively related. Ensuring that high-quality borrowers are funded is extremely important. Rich countries have advanced levels of financial development.

Liquidity for a bank means

Liquidity for a bank means that depositors have easy access to funds. Banks will lend the funds from deposits responsibly so that borrowers will not have their loans called in without warning.

Which of the following is true? Adverse selection and asymmetric information are two obstacles presented by moral hazard. Moral hazard and asymmetric information are two obstacles presented by adverse selection. Moral hazard and adverse selection are two obstacles presented by asymmetric information.

Moral hazard and adverse selection are two obstacles presented by asymmetric information.

Which of the following functions of financial intermediaries help reduce transactions costs? (Check all that apply.)

Safekeeping and accounting Providing liquidity

Which of the following is not a key role played by financial intermediaries, according to the text? Pooling savings Setting interest rates Providing liquidity Collecting and processing information

Setting interest rates

Which of the following is true about solving principal-agent problems in debt and equity markets?

The problem may be reduced if managers report more directly to owners.

How does a mutual fund assist in diversification?

They allow investors to purchase fractions of shares.

Which of the following is true about adverse selection and loan contracts?

Unsecured contracts tend to have higher interest rates.

Which of the following is true about adverse selection and loan contracts? Unsecured contracts tend to have higher interest rates. The higher the firm's net worth, the higher the chance of adverse selection problems. Net worth and collateral serve very different functions. Adverse selection problems are less severe with unsecured loans.

Unsecured contracts tend to have higher interest rates. --

Why do we keep money in commercial banks? (select all that apply) Virtual access to accounts No other place to keep money For debit cards Safekeeping

Virtual access to accounts For debit cards Safekeeping`

Adverse selection problems happen _______ a loan is made; moral hazard problems happen _______ a loan is made.

before; after

Lending and borrowing involve _____________ costs; the text credits financial intermediaries' skill in lowering _________ costs with their continued importance.

both transactions and information; information

As a firm's net worth rises, adverse selection problems tend to _______, and pledging personal items as collateral becomes _______ necessary.

decrease; less

Consider a $100,000 loan made by a bank. The bank would be most likely to provide risk diversification by

forming the loan from small amounts - say, $100 each - from many deposits.

Moral hazard problems occur in stock transactions when

funds are used for reasons that benefit managers instead of owners

The original bankers were

goldsmiths

Financial intermediaries can reduce adverse selection problems in lending by _____

having access to borrower credit information and account history

Historically, goldsmiths _____.

held gold for people in lieu of a receipt began to hold gold for people as a way of safekeeping began to loan gold from wealthy people to the less fortunate

Restrictive covenants

help solve the moral hazard in debt finance.

Diversification on the part of banks can be achieved by

making loans from many different depositors.

The insurance industry tend to be recognized as the starting point for

moral hazard.

Mutual funds

offer a low-cost way for savers to diversify. - The minimum investment is only a few thousand dollars —perfect for "small savers." And because mutual fund companies specialize in this activity costs are low.

Solutions to the moral hazard in equity financing are complicated unless

owners can easily fire managers.

debt financing

partially eliminates the problem of moral hazard.

Services offered by banks include

providing Internet access to bank information and ATM machines.

Today, banks make depositors feel that their deposited funds will be safe in part by

relying on their strong reputations.

One way to help with adverse selection problems in financial markets is to

require more collateral from borrowers.

To be able to find funds to make large loans, it's essential that banks attract sufficient ____. Multiple choice question.

savers

Venture capital firms specialize in risky ventures. tend to NOT monitor new firms. monitor new companies. specialize in non-risky ventures.

specialize in risky ventures. monitor new companies.

Banks must lessen asymmetric information problems because when loans are made

the borrower knows more than the lender.

The concept of moral hazard originated in ________.

the insurance industry

The payments system refers to

the network that transfers funds from one account to another

Figure 11.1, which puts domestic credit as a percent of GDP on the horizontal axis and real GDP per capita on the vertical axis, indicates that _____.

there is a strong positive relationship between a nation's financial development and its per-capita real GDP

Historically, goldsmiths _____. (select all that apply) held gold for people in lieu of a receipt opposed loaning holding gold for people as a way of safekeeping began to loan gold from wealthy people to the less fortunate began to hold gold for people as a way of safekeeping

- held gold for people in lieu of a receipt -began to loan gold from wealthy people to the less fortunate - began to hold gold for people as a way of safekeeping

Solutions to the moral hazard in equity financing are complicated unless

-Align managers' interests with stockholders' interests -The ability to fire managers -Require managers to own a stake in the firm

Which of the following is a solution to the moral hazard in equity finance? (Select all that apply) -Align managers' interests with stockholders' interests -The ability to fire managers -The inability to fire managers -Require managers to own a stake in the firm

-Align managers' interests with stockholders' interests -The ability to fire managers -Require managers to own a stake in the firm

Which of the following are examples of monitoring to reduce moral hazard? -A bank doing a credit check on a potential borrower -Financial intermediaries holding a large number of shares in a firm -eBay buyers' insurance -A bank employee verifying cars in a new car lot

-Financial intermediaries holding a large number of shares in a firm -eBay buyers' insurance -A bank employee verifying cars in a new car lot

Which of the following is true about banks as a source of funding?

Banks are not as dominant a source of funding as they once were, but they are still quite important.

Financial intermediaries tend to lower the cost of lending and borrowing. Which of the following functions help lower the cost?

Diversifying risk Supplying liquidity Safekeeping and accounting services Pooling resources for small savers

Indicate the purpose of financial institutions.

For financial intermediation

Why do we keep money in commercial banks? (Check all that apply.) For safekeeping For virtual access to accounts For debit cards No other place to keep money

For safekeeping For virtual access to accounts For debit cards

Which of the following best summarizes the information available when a loan is made?

Information is asymmetric (uneven) because the borrower knows more than the lender.

The network that transfers funds from one account to another is called the _________.

Payment system

Which of the following functions of financial intermediaries help reduce transactions costs? (Check all that apply.) Pooling the resources of small savers Acting as a lender of last resort Collecting and processing information services Diversifying risk

Pooling the resources of small savers Diversifying risk

Which of the following is a key role played by financial intermediaries, according to the text?

Providing liquidity

Borrowers and lenders come together through banks. As such, this financial institution acts as

a financial intermediary.

According to Akerlof's paper on adverse selection in used car markets, if used cars can be classified as either "peaches" (above-average quality) or "lemons" (below-average quality), then used cars will sell for ____________ and the supply of used cars will be made up of __________.

a price between a peach and a lemon; lemons only -

Which of the following states is true as it relates to financial systems? a. Ensuring that high-quality borrowers are funded is extremely important. b. Credit to the private sector and GDP are positively related. c. Credit to the private sector and GDP are negatively related. d. Rich countries have advanced levels of financial development.

a. Ensuring that high-quality borrowers are funded is extremely important. b. Credit to the private sector and GDP are positively related. d. Rich countries have advanced levels of financial development.

The text showed in an exhibit that the United States, the United Kingdom, Germany and Japan all fund the majority of their business finance through

internal funds.

Of the four listed, which of the following nations receives the highest percentage of business financing from financial intermediaries?

japan

The ease with which an asset can be converted into a means of payment refers to ____.

liquidity

A measure of the ease and cost with which an asset can be turned into the means of payment refers to _________; a highly ______ asset can be transformed into money quickly, easily, and at low cost.

liquidity; liquid

When adverse selection problems exist in stock and bond markets, high-quality stocks will be priced ________ and high-quality bonds will pay a risk premium that is ___________.

too low; too high -When we are unsure about the true quality of a financial asset, we will price and set risk premiums at the average level of quality and risk. So high-quality stocks, priced as if they are of average quality, will leave the market because of the insufficient price. And high-quality bonds, stuck with a risk premium as if they bear average risk, will leave the market because of the excessive yield borrowers must pay.