Money and Banking exam 2

When ________ was Secretary of the Treasury, he argued for ________.

Alexander Hamilton; a central bank

Screening for home mortgages relies most heavily on

All of the answers are correct.

Subprime lenders include

All of the answers are correct.

The U.S. government encourages home ownership by

All of the answers are correct.

To minimize moral hazard, many banks require

All of the answers are correct.

Methods to reduce information asymmetries include using

All of these are methods.

Banks' strategies designed to solve moral hazard problems include

All of these are strategies.

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

Community banks have a niche in small-business lending.

Which of the following statements about international banking is true?

Hundreds of foreign banks now have subsidiaries in the United States.

In Akerlof'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, I. owners of high-quality cars are not willing to sell their cars. II. owners of poor-quality cars want to sell their cars. III. buyers will only have access to high-quality cars

I and II

To reduce moral hazard after buying a stock or bond, individual savers should examine a firm's I. past earnings. II. future projects. III. managers.

II and III

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.'

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

London

Famous entrepreneur and "lifestyle adviser" ________ was found guilty of ________.

Martha Stewart; insider trading

The _____ Act restricts banks from holding more than ____ percent of all commercial bank deposits.

Riegle-Neal; 10

The largest provider of loans from the Federal Family Education Loans Program is

Sallie Mae.

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.

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

Takeover

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.

Which of the following statements about a Ponzi scheme is true?

The schemer sends clients false statements showing that their wealth is increasing.

Which of the following statements about money-center banks is true?

Their headquarters are located in a major financial center.

Which of the following are among the "Five Ps" of business lending?

There is no such thing as the "Five Ps" of business lending.

Characteristics of payday lenders include which of the following?

They charge 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 businesses.

Which of the following allowed Fannie Mae and Freddie 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 Mae and Freddie Mac?

They were put into conservativeship.

Which of the following statements about thrifts institutions is true?

Thrifts are divided into credit unions and savings institutions.

_______ firms buy ownership shares (i.e., a substantial share) in a new company, which is used to finance the company's expansion.

Venture capital

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 mortgages require ________ while many subprime mortgages were offered with ________.

a substantial down payment; "zero down."

Credit ratings reduce

adverse selection.

Banks are reluctant to lend to borrowers with weak credit histories because of _____; they rely on ______ to reduce this problem.

adverse selection; credit reports

To minimize the problem of ________ before purchasing a stock, you should ________.

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

Because of ________, banks prefer to develop ________ with customers.

adverse selection; long-term relationships

Applying the principal-agent terminology to financial markets, firms are the ____ and savers are the _____.

agents; principals

Banks often merge

all of these are correct

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 selection problem helps to explain why sometimes firms issue _____ rather than _____.

bonds; stocks

Money-center banks finance their lending primarily through

borrowing from other banks.

The two main types of banks are

commercial and thrifts.

Banks that are considered too big to fail

could disrupt the entire financial system if allowed to fail.

When banks made loans, they traditionally ____; in recent years, they have ________ the loans.

kept the loan on their own books; securitized

The U.S. government encourages home ownership by

tax incentives.

The Sarbanes-Oxley Act created ________ to monitor accounting auditors' performance.

the Accounting Oversight Board

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

the McFadden Act (1927)

The country with the largest number of banks is

the United States.

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 ________ arise(s).

the free-rider problem

Banks are careful at screening potential borrowers because they are

the sole recipient of the benefits of loans.

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

threat of appropriate violence.

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

transaction costs.

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 percent in a year. Suppose there are two firms that are trying to raise 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

By 2007, over ________ of all mortgages were securitized.

25 percent

Which of the following statements about regional and superregional banks is true?

A superregional bank operates across most of the United States.

According to a study by economists at Harvard and the University of Chicago, stock market activity is highest with ________ legal systems.

English

Finance companies are not as heavily regulated as commercial banks, which enables them to make subprime loans. Reason(s) for this light regulation include(s) which of the following?

Finance companies do not accept deposits.

Recipients of Stafford student loans receive their funding from one of two different programs

Ford Direct Loan Program or Federal Family Education Loan Program.

The result of the populists' belief that risky bank behavior helped cause the Great Depression was the

Glass-Steagall Act.

The creation of the financial holding company Citigroup was made possible by the passage of the

Gramm-Leach-Bliley Act.

Which of the following deposits are called Eurodollars?

dollars deposited in a foreign branch of Chase Manhattan located in Paris.

Eurodollars are

dollars deposited in banks outside of the United States.

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 Jackson's primary goals when elected president was to

eliminate the Second Bank of United States.

If a large number of savers want 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-rider problem

A bank charter is a

government license to operate a bank.

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

individual savers can observe others' actions and do the same.

The government abolished the _____ program in 2010 in favor of a _____ program to reduce the government's cost to help students finance their education.

loan guarantee; direct loan

Savings institutions focus primarily on

making home mortgage loans.

George Mason University economist Gordon Tullock once suggested that to make people drive more safely automobile manufacturers should put a spike in the middle of the steering wheel. This is one way of getting rid of

moral hazard.

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

moral hazard.

Hostile takeovers reduce ________ because if a company is poorly managed, there is an incentive to ________.

moral hazard; change 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 selection 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.

The interest rate offered by banks to their 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 taking 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 informationA project that pays $125 with a probability of 0.75, or it pays $75.A project that pays $200 with a probability of 0.25, 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 agencies 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 Commission's main goals is to

reduce information asymmetries.

SEC efforts 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 a common group of people.

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 a lot of money.

Banks mitigate adverse selection by

screening potential borrowers.

The process of transforming loans into securities is called

securitization.

The Gramm-Leach-Bliley Act, which fully repealed the ________ was passed in 1999.

separation of commercial banks and securities firms