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Unformatted text preview: Chapter 22 Risk Management in Financial Institutions 22.1 Multiple Choice 1) Banks face the problem of _____ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud Answer: A 2) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse credit risk. B) adverse selection. C) moral hazard. D) lemon lenders. Answer: B 3) Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the A) adverse selection problem. B) lemon problem. C) adverse credit risk problem. D) moral hazard problem. Answer: D 4) Banks attempts to solve adverse selection and moral hazard problems help explain loan management principles such as A) screening and monitoring of loan applicants. B) collateral and compensating balances. C) credit rationing. D) all of the above. E) only (A) and (B) of the above. Answer: D 5) In one sense, _____ appears surprising since it means that the bank is not _____ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing Answer: A 292 6) From the standpoint of _____, specialization in lending is surprising but makes perfect sense when one considers the _____ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection Answer: D 7) Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called A) proscription bonds. B) restrictive covenants. C) due-on-sale clauses. D) liens. Answer: B 8) Banks attempt to screen good from bad credit risks to reduce the incidence of loan defaults. To do this, banks A) specialize in lending to certain industries or regions. B) write restrictive covenants into loan contracts. C) expend resources to acquire accurate credit histories of their potential loan customers. D) do all of the above. Answer: D 9) A banks commitment (for a specified future period of time) to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called A) credit rationing. B) a line of credit. C) continuous dealings. D) none of the above. Answer: B 10) Long-term relationships between banks and their customers and lines of credit A) reduce the costs of information collection. B) make it easier for banks to screen good from bad risks....
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This note was uploaded on 02/21/2011 for the course FIN 3403 taught by Professor Duong during the Spring '08 term at The University of Oklahoma.
- Spring '08