Financial Markets and Institutions, 7e (Mishkin)
Chapter 7 Why Do Financial Institutions Exist?
7.1 Multiple Choice 1) Of the following sources of external finance for American American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bons an commercial paper. !) nonbank loans. Answer" B #uestion $tatus" %re&ious 'ition () Of the following sources of external finance for American American nonfinancial businesses, the most important is A) loans from banks. B) stocks. C) bons an commercial paper. !) nonbank loans. Answer" ! #uestion $tatus" %re&ious 'ition ) Of the sources of external funs for nonfinancial businesses in the *nite $tates, bons account for approximatel+ of the total. A) 1- B) (- C) - !) /- Answer" C #uestion $tatus" %re&ious 'ition 0) Of the sources of external funs for nonfinancial businesses in the *nite $tates, stocks account for approximatel+ of the total. A) 1- B) (- C) - !) 0- Answer" A #uestion $tatus" %re&ious 'ition
/) ith ith regar to external sources of financing for nonfinancial businesses in the *nite $tates, which of the following are accurate statements2 A) Marketable securities account for a larger share of external business financing in the *nite $tates than in most other countries. B) $ince 137-, less than / of newl+ issue corporate bons an commercial paper ha&e been sol irectl+ to American househols. C) 4he stock market accounte for the largest share of the financing of American businesses in the 137-5 (--- perio. !) All of the abo&e. ') Onl+ A an B of the abo&e. abo& e. Answer" ' #uestion $tatus" %re&ious 'ition 6) ith ith regar to external sources of financing for nonfinancial businesses in the *nite $tates, which of the following are accurate statements2 A) !irect finance is use in less than / of the external financing of American businesses. B) Onl+ large, well5establishe corporations ha&e access to securities markets to finance their acti&ities. C) oans from banks an other financial intermeiaries in the *nite $tates pro&ie fi&e times more financing of corporate acti&ities than o stock markets. !) All of the abo&e. ') Onl+ A an B of the abo&e. abo& e. Answer" ! #uestion $tatus" %re&ious 'ition 7) 89) 9n the *nite $tates, nonbank loans are the most important source of external funs for nonfinancial businesses. 899) 9n :erman+ an ;apan, issuing stocks an bons is the most important source of external for nonfinancial businesses. A) 89) is true, 899) false. B) 89) is false, 899) true. C) Both are true. !) Both are false. Answer" A #uestion $tatus" %re&ious 'ition <) hich of the following is not one of the eight basic facts about financial structure2 A) !ebt contracts are t+picall+ extremel+ complicate legal ocuments that place substantial restrictions on the beha&ior of the borrower. B) 9nirect finance, which in&ol&es the acti&ities of financial intermeiaries, is man+ times more important than irect finance in which businesses raise funs irectl+ from leners in financial markets. C) Collateral is a pre&alent feature of ebt contracts for both househols an businesses. !) =ew securit+ issues is the most important source of external funs to finance businesses. Answer" ! #uestion $tatus" %re&ious 'ition
3) hich of the following is not one of the eight basic facts about financial structure2 A) 4he financial s+stem is among the most hea&il+ regulate sectors o f the econom+. B) 9ssuing marketable securities is the primar+ wa+ businesses finance their operations. C) 9nirect finance, which in&ol&es the acti&ities of financial intermeiaries, is man+ times more important than irect finance in which businesses raise funs irectl+ from leners in financial markets. !) >inancial intermeiaries is the most important source of external funs to finance businesses. Answer" B #uestion $tatus" %re&ious 'ition 1-) Because information is scarce, A) e?uit+ contracts are use much more fre?uentl+ to raise capital than are ebt contracts. B) monitoring managers gi&es rise to costl+ state &erification. C) go&ernment regulations, such as stanar accounting principles, can help reuce moral ha@ar. ha @ar. !) all of the abo&e are true. ') onl+ B an C of the abo&e are true. Answer" ' #uestion $tatus" %re&ious 'ition 11) hich of the following best explains the recent ecline in the role of financial intermeiaries2 A) %ri&ate prouction an sale of information B) :o&ernment regulation to increase information C) 9mpro&ements in information technolog+ !) =one of the abo&e can explain the recent ecline Answer" C #uestion $tatus" %re&ious 'ition 1() 89) 4he total cost of carr+ing out a transaction in financial markets increases proportionall+ with the si@e of the transaction. 899) >inancial intermeiaries facilitate i&ersification i&ersification when an in&estor has onl+ a small sum to in&est. A) 89) is true 899) false. B) 89) is false 899) true. C) Both 89) an 899) are true. !) Both 89) an 899) are false. Answer" B #uestion $tatus" %re&ious 'ition 1) 9f ba creit risks are the ones who most acti&el+ seek loans an, therefore, recei&e them from financial intermeiaries, then financial intermeiaries face the problem of A) moral ha@ar. B) a&erse selection. C) free5riing. !) costl+ state &erification. Answer" B #uestion $tatus" %re&ious 'ition
10) 9f borrowers take on big risks after obtaining a loan, then leners face the problem of A) free5riing. B) a&erse selection. C) moral ha@ar. !) costl+ state &erification. Answer" C #uestion $tatus" %re&ious 'ition 1/) Because of the lemons problem in the use car market, the a&erage ?ualit+ of the use cars c ars offere for sale will be , which gi&es rise to the problem of . A) low moral ha@ar B) low a&erse selection C) high moral ha@ar !) high a&erse selection Answer" B #uestion $tatus" %re&ious 'ition 16) 9n the use car market, as+mmetric information leas to the lemons problem because the price that bu+ers are willing to pa+ will A) reflect the highest ?ualit+ of use cars in the market. B) reflect the lowest ?ualit+ of use cars in the market. C) reflect the a&erage ?ualit+ of use cars in the market. !) none of the abo&e. Answer" C #uestion $tatus" %re&ious 'ition 17) 4he problem create b+ as+mmetric information before the transaction occurs is calle , while the problem create after the transaction occurs is calle . A) a&erse selection moral ha@ar B) moral ha@ar a&erse selection C) costl+ state &erification free5riing !) free5riing costl+ state &erification Answer" A #uestion $tatus" %re&ious 'ition 1<) A borrower who takes out a loan usuall+ has better information about the potential returns an risks of the in&estment proects he plans to unertake than the lener oes. 4his ine?ualit+ of information is calle A) moral ha@ar. B) as+mmetric information. C) noncollaterali@e risk. !) a&erse selection. Answer" B #uestion $tatus" %re&ious 'ition
13) A&erse selection is a problem associate with e?uit+ an ebt contracts arising from A) the leners relati&e lack of information about the borrowers potential returns an risks of his in&estment acti&ities. B) the leners inabilit+ to legall+ re?uire sufficient collateral to co&er a 1-- percent loss if the borrower efaults. C) the borrowers lack of incenti&e to seek a loan for highl+ risk+ in&estments. !) none of the abo&e. Answer" A #uestion $tatus" %re&ious 'ition (-) Moral ha@ar is a problem associate with ebt an e?uit+ contracts arising from A) the borrowers incenti&e to unertake highl+ risk+ in&estments. B) the owners inabilit+ to ensure that managers will act in the owners interest. C) the ifficult+ leners ha&e in sorting out goo creit risks from ba creit risks. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition (1) Because of the a&erse selection problem, A) leners ma+ make a isproportionate amount of loans to ba creit risks. B) leners ma+ refuse loans to ini&iuals with low net worth. C) leners are reluctant to make loans that are not secure b+ collateral. !) all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition (() Because of the a&erse selection problem, A) goo creit risks are more likel+ to seek loans, causing leners to make a isproportionate amount of loans to goo creit risks. B) leners ma+ refuse loans to ini&iuals with high net worth, because of their greater procli&it+ to Dskip town.D C) leners are reluctant to make loans that are not secure b+ collateral. !) all of the abo&e. Answer" C #uestion $tatus" %re&ious 'ition () 4he problem of a&erse selection helps to explain A) wh+ banks prefer to make loans secure b+ collateral. B) wh+ banks ha&e a comparati&e a&antage in raising funs for American businesses. C) wh+ borrowers are willing to offer collateral to secure their promises to repa+ loans. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ! #uestion $tatus" %re&ious 'ition
(0) 4he problem of a&erse selection helps to explain A) which firms are more likel+ to obtain funs from ban ks an other financial intermeiaries, rather than from securities markets. B) wh+ collateral is an important feature of consumer, but not business, ebt con tracts. C) wh+ irect finance is more important than inirect finance as a source of business finance. !) onl+ A an B of the abo&e. ab o&e. Answer" A #uestion $tatus" %re&ious 'ition (/) 4he concept of a&erse selection helps to explain A) wh+ collateral is not a common feature of man+ ebt contracts. B) wh+ large, well5establishe corporations fin it so ifficult to borrow funs in securities markets. C) wh+ financial markets are among the most hea&il+ regulate sectors of the econom+. !) all of the abo&e. Answer" C #uestion $tatus" %re&ious 'ition (6) 4hat most use cars are sol b+ intermeiaries 8i.e., use car ealers) pro&ies e&ience that these intermeiaries A) ha&e been affore special go&ernment treatment, since use car ealers o not pro&ie information that is &alue b+ consumers of use cars. B) are able to pre&ent potential p otential competitors from free5riing off the information that the+ pro&ie. C) ha&e faile to sol&e a&erse selection problems in this market because DlemonsD continue to be trae. !) o all of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition (7) 4hat most use cars are sol b+ intermeiaries 8i.e., use car ealers) pro&ies e&ience that these intermeiaries A) pro&ie information that is &alue b+ consumers of use cars. B) are able to pre&ent others o thers from free5riing off the information that the+ pro&ie. C) can profit b+ becoming experts in etermining whether an automobile is a g oo car or a lemon. !) o all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition (<) A ke+ fining of the economic anal+sis of financial structure is that A) the existence of the free5rier problem for trae securities helps to explain wh+ banks pla+ a preominant role in financing the acti&ities of businesses. B) while free5rier problems limit the extent to which securities markets finance some business acti&ities, the maorit+ of funs going to businesses are channele through securities markets. C) gi&en the great extent to which securities markets are regulate, free5rier problems are not of significant economic conse?uence in these markets. !) economists o not ha&e a &er+ goo explanation for wh+ securities markets are so hea&il+ regulate. Answer" A #uestion $tatus" %re&ious 'ition
(3) 9n the *nite $tates, the go&ernment g o&ernment agenc+ re?uiring that firms, which sell securities in public markets, ahere to stanar accounting principles p rinciples an isclose information about their sales, assets, an earnings is the A) >eeral Corporate $ecurities Commission. B) >eeral 4rae Commission. C) $ecurities an 'xchange Commission. !) *.$. 4reasur+ !epartment. ') >eeral Eeser&e $+stem. Answer" C #uestion $tatus" %re&ious 'ition -) An auit certifies that A) a firms loans will be repai. B) a firms securities are safe in&estments. C) a firm abies b+ stanar accounting principles. !) the information reporte in a firms accounting statements is correct. Answer" C #uestion $tatus" %re&ious 'ition 1) 4he authors anal+sis of a&erse selection inicates that financial intermeiaries in general, an banks in particular 8because the+ hol a large fraction of nontrae loans), A) ha&e a&antages in o&ercoming the free5rier problem, helping to explain wh+ inirect finance is a more important source of business finance than irect finance. B) pla+ a greater role in mo&ing funs to corporations than o securities markets as a result of their abilit+ to o&ercome the free5rier problem. C) pro&ie better5known an larger corporations a higher percentage o f their external funs than the+ o to newer an smaller corporations, which rel+ to a greater extent on the new issues market for funs. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition () 4he authors anal+sis of a&erse selection inicates that financial intermeiaries A) o&ercome free5rier problems b+ holing nontrae loans. B) must bu+ securities from corporations to i&ersif+ the risk that results from holing nontraable loans. C) ha&e not been &er+ successful in ealing with a&erse selection problems in financial markets. !) o all of the abo&e. ') o onl+ A an B of the abo&e. Answer" A #uestion $tatus" %re&ious 'ition ) 4he pecking orer h+pothesis preicts that the a corporation is, the more likel+ it will be to . A) smaller an less well known issue securities B) larger an more well known borrow from financial intermeiaries C) larger an more well known issue securities !) smaller an less well known nee external financing Answer" C #uestion $tatus" %re&ious 'ition
0) >inancial intermeiaries 8banks in particular) ha&e the abilit+ to a&oi the free5rier problem as long as the+ primaril+ A) make pri&ate loans. B) ac?uire a i&ersifie portfolio of stocks. C) bu+ unk bons. !) o a balance combination of A an B of the abo&e. abo& e. Answer" A #uestion $tatus" %re&ious 'ition /) %ropert+ that is plege to the lener in the e&ent that a borrower cannot make his or her ebt pa+ment is calle A) points. B) interest. C) collateral. !) goo faith mone+. Answer" C #uestion $tatus" %re&ious 'ition 6) Collateral is A) propert+ that is plege to the lener if a borrower cannot make his or her ebt pa+ments. B) a pre&alent feature of ebt contracts for househols. C) a pre&alent feature of ebt contracts for businesses. !) all of the abo&e. ') onl+ A an C of the abo&e. abo &e. Answer" ! #uestion $tatus" %re&ious 'ition 7) 4he maorit+ of househol ebt in the *nite $tates consists of A) creit car ebt. B) consumer installment ebt. C) collaterali@e loans. !) unsecure loans, such as stuent loans. Answer" C #uestion $tatus" %re&ious 'ition <) Commercial an farm mortgages, in which propert+ is plege as collateral, account for A) one5?uarter of borrowing b+ nonfinancial businesses. B) one5half of borrowing b+ nonfinancial businesses. C) one5twentieth of borrowing b+ nonfinancial businesses. !) two5thirs of borrowing b+ nonfinancial businesses. Answer" A #uestion $tatus" %re&ious 'ition 3) Because of the moral ha@ar problem, A) leners will write ebt contracts that restrict certain acti&ities of borrowers. B) leners will more reail+ len to borrowers with high net worth. C) ebt contracts are use less fre?uentl+ to raise capital than e?uit+ contracts. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition
0-) Moral ha@ar in e?uit+ contracts is known as the problem because the manager of the firm has fewer incenti&es to maximi@e profits than the stockholers might ieall+ prefer. A) principal5agent B) a&erse selection C) free5rier !) ebt eflation Answer" A #uestion $tatus" %re&ious 'ition 01) Because managers 8) ha&e less incenti&e to maximi@e profits than the stockholers5owners 8) o, stockholers fin it costl+ to monitor managers thus, stockholers are reluctant to purchase e?uities. A) principals agents B) principals principals C) agents agents !) agents principals Answer" ! #uestion $tatus" %re&ious 'ition 0() 4he principal5agent problem A) occurs when managers ha&e more incenti&e to maximi@e profits than the stockholers5owners o. B) woul not arise if the owners of the firm ha complete information about the acti&ities of the managers. C) in financial markets helps to explain wh+ e?uit+ is a relati&el+ important source of finance for American businesses. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" B #uestion $tatus" %re&ious 'ition 0) $olutions to the moral ha@ar problem inclue A) high net worth. B) monitoring an enforcement of restricti&e co&enants. C) greater reliance on e?uit+ contracts an less on ebt contracts. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition 00) One financial intermeiar+ in our financial structure that helps to reuce the moral ha@ar arising from the principal5agent problem is the A) &enture capital firm. B) mone+ market mutual fun. C) pawn broker. !) sa&ings an loan association. Answer" A #uestion $tatus" %re&ious 'ition
0/) A &enture capital firm protects its e?uit+ in&estment from moral ha@ar through which of the following means2 A) 9t places people on the boar of irectors to better monitor the borrowing firms acti&ities. B) 9t writes contracts that prohibit the sale of an e?uit+ in&estment to an+one but the &enture capital firm. C) 9t prohibits the borrowing firm from replacing its management. !) 9t oes both A an B of the abo&e. ') 9t oes both A an C of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition 06) !ebt contracts A) are agreements b+ the borrowers to pa+ pa + the leners fixe ollar amounts at perioic inter&als. B) ha&e an a&antage o&er e?uit+ contracts in that the+ ha&e a lower cost of state &erification. C) are use much more fre?uentl+ to raise capital than e?uit+ contracts. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ! #uestion $tatus" %re&ious 'ition 07) '?uit+ contracts account for a small fraction of external funs raise b+ American businesses because A) costl+ state &erification makes the e?uit+ contract less esirable than the ebt contract. B) there is greater scope for moral ha@ar problems uner e?uit+ contracts, as compare to ebt contracts. C) e?uit+ contracts o not permit borrowing firms to raise aitional funs b+ issuing ebt. !) all of the abo&e. ') both A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition 0<) A ebt contract is sai to be incenti&e compatible if A) the borrowers net worth reuces the probabilit+ of moral ha@ar. B) restricti&e co&enants limit the t+pe of acti&ities that can be unertaken b+ the borrower. C) both A an B of the abo&e abo &e occur. !) neither A nor B of the abo&e occur. Answer" A #uestion $tatus" %re&ious 'ition 03) A ebt contract is more likel+ to be incenti&e compatible if A) the compan+ must follow stanar accounting principles. B) the funs are pro&ie b+ a &enture capital firm. C) owners of the firm ha&e more of their own mone+ in the business. !) all of the abo&e. ') onl+ B an C. Answer" C #uestion $tatus" %re&ious 'ition
/-) A clause in a mortgage loan contract con tract re?uiring the borrower to purchase homeowners insurance is an example of A) a restricti&e co&enant. B) a collusi&e agreement between mortgage leners an insurance companies. C) both A an B of the abo&e. abo &e. !) neither A nor B of the abo&e. Answer" A #uestion $tatus" %re&ious 'ition /1) A ebt contract that specifies that the compan+ can onl+ use the funs to finance certain acti&ities A) is a pri&ate loan. B) contains a restricti&e co&enant. C) increases the problem of a&erse selection. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" B #uestion $tatus" %re&ious 'ition /() hich of the following are accurate statements concerning the role that restricti&e co&enants pla+ in reucing moral ha@ar in financial markets2 A) Co&enants reuce moral ha@ar b+ restricting borrowers unesirable beha&ior. B) Co&enants re?uire that borrowers keep collateral in g oo conition. C) Co&enants re?uire perioic accounting statements an income reports. !) All of the abo&e. ') Onl+ A an B of the abo&e. abo& e. Answer" ! #uestion $tatus" %re&ious 'ition /) Although restricti&e restricti&e co&enants can potentiall+ p otentiall+ reuce moral ha@ar, a problem with restricti&e co&enants is that A) borrowers ma+ fin loopholes that make the co&enants ineffecti&e. B) the+ are costl+ to monitor an enforce. C) too man+ resources ma+ be e&ote to monitoring an enforcing them, as ebtholers uplicate others monitoring an enforcement en forcement efforts. !) all of the abo&e. ') onl+ A an B of the abo&e. abo &e. Answer" ' #uestion $tatus" %re&ious 'ition /0) :o&ernments in e&eloping countries sometimes aopt p olicies that retar the efficient operation of their financial s+stems. 4hese actions inclue policies that A) pre&ent leners from foreclosing on borrowers with political clout. B) nationali@e banks an irect creit to politicall+ fa&ore borrowers. C) make it costl+ to collect pa+ments an collateral from efaulting ebtors. !) o all of the abo&e. ') o onl+ A an B of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition
//) 'conomies of scale A) in the financial markets oes not explain wh+ financial intermeiaries e&elope an ha&e become such an important part of our financial structure. B) can be use to an a&antage b+ reucing transaction cost. C) both A an B of the abo&e. abo &e. !) neither A nor B of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition /6) i?uiit+ ser&ices are ser&ices that A) make it easier for customers to conuct transactions. B) conucts transactions for the customer. C) increase transaction costs. !) all of the abo&e. Answer" A #uestion $tatus" %re&ious 'ition /7) A&erse selection A) is a problem create b+ as+mmetrical information after after the transaction. B) can be sol&e b+ eliminating as+mmetrical information. C) occurs when people who o not pa+ for information take a&antage of the information other people ha&e to pa+ pa + for. !) all of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition /<) 4he free5rier problem A) occurs when people who o not pa+ for information take a&antage of the information other people ha&e to pa+ pa + for. B) suggests that the pri&ate sale of information will onl+ be a partial solution to the lemons problem. C) pre&ents the pri&ate market from proucing enough information to eliminate all the as+mmetric information that leas to a&erse selection. !) all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition /3) Ba firms A) o not ha&e an incenti&e to make themsel&es look goo. B) will slant the information the+ are re?uire to transmit to the p ublic. C) both A an B of the abo&e. abo &e. !) neither A nor B of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition
6-) A bank A) has the abilit+ to profit from the information it prouces. B) a&ois the free5rier problem b+ primaril+ making pri&ate loans rather than b+ purchasing securities that are trae in the open market. C) becomes an expert in etermining etermining goo firms from ba firms. !) all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition 61) =et worth A) is the ifference between current assets an current liabilities. B) is the ifference between assets an liabilities. C) is total assets i&ie b+ total liabilities. !) is total assets plus total liabilities. Answer" B #uestion $tatus" %re&ious 'ition 6() 'conomies of scope refer to cost sa&ings that arise when the A) si@e of financial transactions increase. B) si@e of financial transactions ecrease. C) number of ifferent acti&ities unertaken increases. !) number of ifferent acti&ities unertaken ecreases. Answer" C #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 6) A financial financial institution can achie&e cost sa&ings b+ engaging en gaging in multiple acti&ities. 4hese are calle economies of A) scope. B) scale. C) complexit+. complexit+. !) information. Answer" A #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 60) A financial institution can achie&e cost sa&ings in its creit car operations if it increases the number of carholers. 4his is an example of economies o f A) scope. B) scale. C) complexit+. complexit+. !) information. Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 6/) hich combination of acti&ities within a single financial institution is least likel+ to lea to con flicts of interest2 A) auiting an management a&isor+ ser&ices B) commercial banking an in&estment banking C) assessment of creit ?ualit+ an consulting !) consumer lening an business lening Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter
66) Conflicts of interest pose a problem because the+ A) lower the ?ualit+ of information. B) increase problems of as+mmetric information. C) make the financial s+stem less efficient. !) o all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 67) An a&antage of pro&iing multiple financial ser&ices within one financial institution is that it A) lowers information costs. B) e&elops broaer long5term relationships with customers. C) both A an B of the abo&e. abo &e. !) none of the abo&e. Answer" C #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 6<) A conflict conflict of interest occurs when A) a financial firm sells a ser&ice to its customers for a price that e xcees the cost of proucing the ser&ice. B) leners prefer higher interest rates an borrowers prefer lower interest rates. C) riskier borrowers are the ones who are more likel+ to appl+ for loans. !) people expecte to pro&ie p ro&ie reliable information to the public ha&e incenti&es not to o so. Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 63) A conflict conflict of interest between pro&iing impartial research about companies issuing securities an selling those same securities arises in A) in&estment banking. B) commercial banking. C) accounting firms. !) mutual funs. Answer" A #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7-) 9f potential re&enues from unerwriting greatl+ excee brokerage commissions, there is incenti&e for in&estment bank anal+sts to report information about firms issuing securities. A) stronger unbiase B) stronger fa&orable C) weaker unbiase !) weaker fa&orable Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter
71) $pinning is the practice of A) in&estment banks allowing executi&es of potential client c ompanies to bu+ unerprice initial public offerings of other companies securities. B) in&estment bank anal+sts pro&iing misleaing information about a compan+ to encourage more in&estors to purchase the compan+s securities. C) accounting firms encouraging its auit clients to also pu rchase its management a&isor+ ser&ices. !) creit rating agencies pro&iing higher ratings on a compan+s securities in orer to e&elop a long5 term relationship with the compan+. Answer" A #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7() 9n&estment banks are guilt+ of conflict of interest when the+ A) pressure their anal+sts to prouce research fa&orable to their client firms. B) permit executi&es of client firms to alter anal+sts research on their firms. C) prohibit anal+sts from making negati&e or contro&ersial comments about client firms. !) all of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7) 9n&estment banks ser&e two client groups, A) home bu+ers an mortgage leners. B) people sa&ing for retirement an pension funs. C) issuers of securities an in&estors in those securities. !) mutual funs an in&estors with relati&el+ small amounts to in&est. Answer" C #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 70) Auitors attempt to reuce information as+mmetr+ between a firms managers an its A) customers. B) owners. C) emplo+ees. !) competitors. Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7/) Conflicts of interest in the Arthur Anersen Anersen accounting firm intensifie when became the firms largest source of profits an large clients pressure office managers to gi&e fa&orable auits. A) consulting regional B) consulting national C) auiting regional !) auiting national Answer" A #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter
76) 4he potential conflict of interest when a single acco unting firm pro&ies both auiting an consulting ser&ices is that the firm can A) charge higher fees to its auit clients an lower fees for its consulting ser&ices so it can expan its consulting business. B) charge higher fees to its consulting clients an lower fees for its auit ser&ices so it can expan its auiting business. C) pro&ie unustifiabl+ fa&orable auit re&iews for firms that are large clients for its consulting ser&ices. !) pressure its clients into pa+ing high fees for both auiting an consulting ser&ices. Answer" C #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 77) 4he conflict of interest in creit5rating agencies arises because pa+ to ha&e securities rate an, as a result, the agencies ratings ma+ be biase . A) securit+ issuers ownwar B) securit+ issuers upwar C) in&estors ownwar !) regulators upwar Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7<) !uring the (--75(--3 financial crisis, housing prices began to fall an subprime mortgages began to efault. hich of the following statements is true about the rating of subprime mortgage proucts2 A) 4he rating agencies were wa+ ahea of the market, gi&ing man+ of the subprime proucts unk ratings from the start. B) Eating agencies were not in&ol&e. $ubprime mortgages coul not be structure, b+ law. C) Man+ AAA5rate subprime proucts ha to be owngrae o&er an o&er again until the+ reache unk status. !) =one of the abo&e are true. Answer" C #uestion $tatus" =ew #uestion 73) $ince firms issuing new securities pa+ to ha&e these securities rate, the creit5rating agencies ha&e incenti&e to to attract more business. A) gi&e fa&orable ratings B) gi&e impartial ratings C) lower the fees the+ charge !) practice spinning Answer" A #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter <-) 4he $arbanes5Oxle+ Act of (--( ealt with conflicts of interest in A) in&estment banks. B) accounting firms. C) creit5rating agencies. !) all of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter
<1) 4he :lobal egal $ettlement of (--( ealt with conflicts of interest in A) accounting firms. B) in&estment banks. C) creit5rating agencies. !) all of the abo&e. Answer" B #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter <() hich of the following pro&isions of legislation to eal with conflicts of interest oes not increase the flow of information in financial markets2 A) re?uiring a firms chief officers to certif+ its financial statements an other isclosures B) re?uiring in&estment banks to make their anal+sts recommenations pu blic C) re?uiring isclosure of off5balance5sheet o ff5balance5sheet transactions !) increasing resources a&ailable to the $ecurities an 'xchange Commission to super&ise financial markets Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter <) 4he :lobal egal $ettlement inclues what ke+ element2 A) 9t irectl+ reuces conflicts of interest. B) 9t pro&ies incenti&es for in&estment banks to not ex ploit conflicts of interest. C) 9t has measures to impro&e the ?ualit+ for information in financial markets. !) All of the abo&e. Answer" ! #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 7.( 4rueF>alse 1) American American businesses get more funs from irect financing than from inirect financing. Answer" >A$' #uestion $tatus" %re&ious 'ition () American American businesses use stock to finance about 1- percent of their external financing. Answer" 4E*' #uestion $tatus" %re&ious 'ition ) One reason wh+ inirect financing is use is to minimi@e a&erse selection problems. Answer" 4E*' #uestion $tatus" %re&ious 'ition 0) 9ssuing marketable securities is the primar+ wa+ businesses finance their operations. Answer" >A$' #uestion $tatus" %re&ious 'ition /) Because of the a&erse selection problem, leners ma+ refuse loans to ini&iuals with low net worth. Answer" 4E*' #uestion $tatus" %re&ious 'ition
6) 4he concept of a&erse selection helps to explain wh+ inirect finance is more important than irect finance as a source of business b usiness finance. Answer" 4E*' #uestion $tatus" %re&ious 'ition 7) 4he problem of a&erse selection helps to explain wh+ irect finance is more important than inirect finance as a source of business b usiness finance. Answer" >A$' #uestion $tatus" %re&ious 'ition <) 4he concept of a&erse selection helps explain wh+ collateral is an important feature of man+ ebt contracts. Answer" 4E*' #uestion $tatus" %re&ious 'ition 3) One wa+ of escribing the solution that high net worth pro&ies to the moral ha@ar problem is to sa+ that it makes ebt contracts incenti&e compatible. Answer" 4E*' #uestion $tatus" %re&ious 'ition 1-) 'conomies of scale means that the percentage return on a financial transaction rises as the si@e of the transaction rises. Answer" >A$' #uestion $tatus" %re&ious 'ition 11) Agenc+ Agenc+ theor+ focuses on how go&ernment agencies regulate financial intermeiaries an markets. Answer" >A$' #uestion $tatus" %re&ious 'ition 1() 4he principal5agent problem is an example of the a&erse selection problem that can result from as+mmetric information. Answer" >A$' #uestion $tatus" %re&ious 'ition 1) 4he financial s+stem is one of the most hea& il+ regulate sectors of the econom+. Answer" 4E*' #uestion $tatus" %re&ious 'ition 10) Collaterali@e ebt is also calle secure eb t. Answer" 4E*' #uestion $tatus" %re&ious 'ition 1/) Most legal work in the *.$. in&ol&es the writing an enforcement of contracts, not ambulance chasing, criminal law, an fri&olous lawsuits. Answer" 4E*' #uestion $tatus" =ew #uestion 16) 4he $arbanes5Oxle+ Act of (--( was passe in response to scanals in the in&estment banking inustr+. Answer" >A$' #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter
17) 4he $arbanes5Oxle+ Act of (--( pro&ies for o&ersight of accounting firms but makes no pro&isions for increasing the flow of information to financial markets. Answer" >A$' #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 1<) 4he $arbanes5Oxle+ Act of (--( an the :lobal egal $ ettlement of (--( both ha&e the potential to reuce economies of scope. Answer" 4E*' #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 13) 4he :lobal egal $ettlement of (--( arose out of a lawsuit brought b+ =ew Gork Gork Attorne+ :eneral 'liot $pit@er against the ten largest in&estment banks. Answer" 4E*' #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter (-) 4he $arbanes5Oxle+ Act of (--( establishe a %ublic Compan+ Accounting O&ersight Boar 8%CAOB), o&erseen b+ the $'C, to super&ise accounting firms an ensure that auits are inepen ent an controlle for ?ualit+. Answer" 4E*' #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter (1) !ue to criticisms of rating agencies following the efault of man+ subprime proucts, the $'C prohibite creit rating agencies from structuring the same same proucts that the+ rate. Answer" 4E*' #uestion $tatus" =ew #uestion 7. 'ssa+ 1) hat are economies of scale in financial transactions2 How ca n financial intermeiaries achie&e these economies2 #uestion $tatus" %re&ious 'ition () 'xplain how the DlemonsD problem coul cause financial markets to fail. #uestion $tatus" %re&ious 'ition ) !istinguish between a&erse selection an moral ha@ar. #uestion $tatus" %re&ious 'ition 0) hat facts about financial structure can be explaine b+ a&erse selection2 #uestion $tatus" %re&ious 'ition /) hat facts about financial structure can be explaine b+ moral ha@ar2 #uestion $tatus" %re&ious 'ition 6) hat factors usuall+ cause an increase in moral ha@ar an a&erse selection2 #uestion $tatus" %re&ious 'ition 7) hat is the principal5agent problem2 #uestion $tatus" %re&ious 'ition
<) hat is the free5rier problem2 !escribe some situations that this problem creates. #uestion $tatus" %re&ious 'ition 3) 4he *.$. has more law+ers per capita than an+ other countr+ in the worl. 9t is also among the richest countries in the worl. 'xplain wh+ these two facts ma+ not be mere coincience. #uestion $tatus" =ew #uestion 1-) h+ shoul we be concerne about conflicts of interest in the financial ser&ices inustr+2 #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 11) hat conflicts of interest can arise in in&estment banking2 #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 1() hat conflicts of interest can arise in accounting firms2 #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 1) hat conflicts of interest can arise in creit5rating agencies2 #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 10) '&aluate the maor pro&isions of $arbanes5Oxle+ an the :lobal egal $ettlement as remeies for conflict of interest problems. #uestion $tatus" %re&ious 'ition 5 !ifferent Chapter 1/) hat issues o critics cite when iscussing wh+ $arbanes5Oxle+ has le to a ecline in *.$. capital markets2 #uestion $tatus" =ew #uestion
