Financial Markets and Institutions: Chapter Two

Financial intermediaries

-exist because there are substantial information and transaction costs in the economy. -improve the lot of the small saver. -are involved in the process of indirect finance. -do only exist because there are substantial information and transaction costs in the economy and improve the lot of the small saver of these.

American investors pay attention to only the Dow Jones Industrial Average.

False

A bond denominated in euros and issued in a country that uses the euro as its currency is an example of a Eurobond.

False, bond denominated in a currency other than that of the country in which it is sold

An important financial institution that assists in the initial sale of securities in the primary market is the

Investment bank

A mutual fund is not a depository institution.

True

When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist.

asymmetric information

The DAX (Germany) and the FTSE 100 (London) are examples of ________.

foreign stock price indexes

The concept of adverse selection helps to explain

only which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets and why indirect finance is more important than direct finance as a source of business finance of these.

Asymmetric information can lead to the widespread collapse of financial intermediaries, referred as financial ________.

panic

Adverse selection is a problem associated with equity and debt contracts arising from

the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.