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Unformatted text preview: Which ofthe followmg statements is false? r The sum ofdirect and indirectﬁnance maybe greaterthan ‘lUD'ﬁi ofa nation's income
3‘ Mutual funds allow small savers better opporlunities for diversiﬁcation With less riskthan would otherwise exist
:- Securities ﬁrms allow potential issuers of stocks and bonds access to ﬁnancial markets °_ :- Dueto information problems, credit extended by banks and otherfinancial intermediaries is on average aboutﬁve times largerthan credit obtained directlythrough stock and bond issuance MuitipleChoice Section'The Role ofFinanciai intermediaries a rd : 2_ ﬂout of 1D po'nts When a ﬁrm wires funds overseas to pay a supplier, the function ofﬁnanciai intermediaries being illustrated is:
r- providing liquidity. #- pooling ofsavings. ea #- safekeeping, accounting, and access to the payments system. F diversiﬁcation ofrlsk. Multiple Choice Section: The Role of Financial Intermediaries Information asymmetries usually arise when one oartyto a transaction. the buyer, has more information about the good or service in the transaction than the other party, the seller. :- Adverse selection explains whya bank loan ofﬁcer knows that each daythe loan applicants being evaluated will have a disproponionately high fraction of‘oad‘ borrowers
r Moral hazard describes failure ofa ﬁrm as being due to poor eﬁort onthe part ofthe manager ratherthan bad luck r Adverse selection problems are usually apparent priorto a transaction while moral hazard problems occur alter a transaction MultipleChoice Section: Information Asymmetries and Information Costs 5 a rd: 4_ 0 out of 10 oints
When your investment adviser mentions two new drug companies that promise to cure cancer, the problem being illustrated is one ofadverse selection. award: 5- I} out of ............... Information costs: 1* can only be eliminated by government regulation ofbanks and otherfinancial intermediaries. r can be eliminated in the equity and bond markets with appropriate regulation, such as provided bythe Securities and Exchange Commission.
1* are, at most, a minor impedimentto the functioning ofﬁnancial markets. °_. 1* inhibit efﬁcient resource use. Multiple Choice Section: Information Asymmetries and Information Costs a ward: 6_ I} out of 10 oints
I A company selling ﬁre insurance on a homefor no more than the replacement cost is an example ofa solution to a problem ofmoral hazard. award: 7- I] out of .............. Mostfinancing ofﬁrms occurs when they obtain funds: :- fromthe issuance ofstockinthe equity markets.
r“ from the issuance ofbonds in the capital markets.
:- from loans issued by intermediaries like banks, insurance companies, and securities firms. 6“ 1'" from DFBVIOUS and ongoing proﬁts. MultipleChoice Section: Financial Intermediaries and Information Costs award: 8_ ﬂout of .............. A mutual fund with a large investment in a particular company seeking board seats is an example of: a“ r- monitoring to reduce the costs associated with moral hazard.
r- screening to reduce the costs associated with adverse selection.
r" reducing the free—riderproblem. r- why ﬁrms use internal funds for capital investment. MultipleChoice Section: Financial Intermediaries and Information Costs a 'r.‘ a rd: 9- 0 out of .... Which ofthe following is not an example of monitoring to reduce moral hazard? r Firm Awatches ﬁrm B for signs ofmismanagement, potentially planning a takeover oﬁer itﬁrm B does not deliver superior results to its shareholders. r Venture capital ﬁrms take equity stakes in new, private companies and otten advise on management in these companies.
r A retirement system with hundreds of billions ofdollars invested in various companies seeks seats on company hoards of directors °_. 1* An investment oankwatches potential stock and pond issuers to deCIde whetherthe oank wants to risk its “reputationai capital‘ on oringing the stocks or bonds to market. Multiple Cti0ice Section: FinanCIai Intermediaries and information Costs a '.'.' a rd: 10- Uoutof ............... 1.“Jhen a ﬁrm borrows at a commercial pankto ﬁnance investment, it is using: eﬁ r- funds raised though ﬁnancial intermediaries.
r- internally generatedfunds.
r- funds raised inthe bond market. rs funds raised in the equity market. MultipleChoice Section: Financial Intermediaries and Information Costs ...
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This note was uploaded on 09/07/2011 for the course ECO 412 taught by Professor Staff during the Spring '05 term at Kentucky.
- Spring '05