Social Science Questions

If potential revenues from underwriting greatly exceed brokerage commissions, there is ________ incentive for investment bank analysts to report ________ information about firms issuing securities.A) stronger; unbiasedB) stronger; favorable C) weaker; unbiased D) weaker; favorable

Because of the adverse selection problem,A) lenders may make a disproportionate amount of loans to bad credit risks. B) lenders may refuse loans to individuals with low net worth.C) lenders are reluctant to make loans that are not secured by collateral.D) all of the above.

Liquidity services are services thatA) make it easier for customers to conduct transactions. B) conducts transactions for the customer.C) increase transaction costs.D) all of the above.

Because of the moral hazard problem,A) lenders will write debt contracts that restrict certain activities of borrowers. B) lenders will more readily lend to borrowers with high net worth.C) debt contracts are used less frequently to raise capital than equity contracts. D) all of the above.E) only A and B of the above.

Economies of scope refer to cost savings that arise when the A) size of financial transactions increase.B) size of financial transactions decrease.C) number of different activities undertaken increases.D) number of different activities undertaken decreases.

Because of the adverse selection problem, lenders may refuse loans to individuals with low net worth.

Nonfinancial businesses in Germany and Japan are more likely to use bank loans over all other sources of external financing.

Although restrictive covenants can potentially reduce moral hazard, a problem with restrictive covenants is thatA) borrowers may find loopholes that make the covenants ineffective.B) they are costly to monitor and enforce.C) too many resources may be devoted to monitoring and enforcing them, as debtholders duplicate others' monitoring and enforcement efforts.D) all of the above.E) only A and B of the above.

Investment banks serve two client groups,A) home buyers and mortgage lenders.B) people saving for retirement and pension funds.C) issuers of securities and investors in those securities.D) mutual funds and investors with relatively small amounts to invest.

A key finding of the economic analysis of financial structure is thatA) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.B) while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets.C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets.D) economists do not have a very good explanation for why securities markets are so heavily regulated.

Financial intermediaries (banks in particular) have the ability to avoid the free-rider problem as long as they primarilyA) make private loans.B) acquire a diversified portfolio of stocks.C) buy junk bonds.D) do a balanced combination of A and B of the above.

In the used car market, asymmetric information leads to the lemons problem because the price that buyers are willing to pay willA) reflect the highest quality of used cars in the market.B) reflect the lowest quality of used cars in the market.C) reflect the average quality of used cars in the market. D) none of the above.

The problem of adverse selection helps to explainA) why banks prefer to make loans secured by collateral.B) why banks have a comparative advantage in raising funds for American businesses. C) why borrowers are willing to offer collateral to secure their promises to repay loans.D) all of the above.E) only A and B of the above

The concept of adverse selection helps to explainA) why collateral is not a common feature of many debt contracts.B) why large, well-established corporations find it so difficult to borrow funds in securities markets.C) why financial markets are among the most heavily regulated sectors of the economy.D) all of the above.

Which of the following best explains the recent decline in the role of financial intermediaries? A) Private production and sale of informationB) Government regulation to increase informationC) Improvements in information technologyD) None of the above can explain the recent decline

Net worthA) is the difference between current assets and current liabilities. B) is the difference between assets and liabilities.C) is total assets divided by total liabilities.D) is total assets plus total liabilities.

The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.A) adverse selection; moral hazardB) moral hazard; adverse selectionC) costly state verification; free-riding D) free-riding; costly state verification

The free-rider problemA) occurs when people who do not pay for information take advantage of the information other people have to pay for.B) suggests that the private sale of information will only be a partial solution to the lemons problem.C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection.D) all of the above.

With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements?A) Direct finance is used in less than 5% of the external financing of American businesses.B) Only large, well-established corporations have access to securities markets to finance their activities.C) Loans from banks and other financial intermediaries in the United States provide five times more financing of corporate activities than do stock markets.D) All of the above.E) Only A and B of the above.

Which of the following is not one of the eight basic facts about financial structure?A) The financial system is among the most heavily regulated sectors of the economy.B) Issuing marketable securities is the primary way businesses finance their operations.C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets.D) Financial intermediaries is the most important source of external funds to finance businesses.