ECON 3703 -X30 ch7-10
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