Deck 8: Financial Structure, Transaction Costs, and Asymmetric Information

Question 1

Intermediaries must charge higher rates of interest than individuals.

Answer 1

False

Question 2

Asymmetric information leads to allocational inefficiencies in financial markets.

Answer 2

True

Question 3

When banks refuse to lend to borrowers at very high rates of interest, they are trying to alleviate the moral hazard problem.

Answer 3

False

Question 4

Asymmetric information problems increase costs to both borrowers and lenders.

Question 5

It is difficult to make profits in the mortgage market due to the free-rider problem.

Question 6

It is difficult to make profits selling information about stock market analysis due to the free rider problem.

Question 7

When venture capitalists take an active role in the management of a company they finance, they are trying to alleviate the moral hazard problem.

Question 8

The two types of asymmetric information problems are adverse selection and moral hazard.

Question 9

The two types of asymmetric information problems are moral hazard and agency problems.

Question 10

Interest on loans is an example of a transactions cost that intermediaries can deal with more efficiently than individuals.

Question 11

The majority of internal finance for firms comes from loans for intermediaries.

Question 12

Some transactions costs arise from agency problems.

Question 13

The majority of external finance for firms comes from stock issues.

Question 14

The cost of accounting fees is an example of a transactions cost that banks can deal with more efficiently than individuals.

Question 15

When banks refuse to lend to borrowers with low net worth, they are trying to alleviate moral hazard problems.

Question 16

The majority of external finance comes from corporate bond issues.

Question 17

Asymmetric information leads to market inefficiencies.

Question 18

Credit ratings help with the adverse selection problem inherent in lending

Question 19

When a child saves her allowance to buy a toy, she is engaged in external finance.

Question 20

The majority of funds raised by firms is done through internal finance.

Question 21

Laws against fraudulent reporting on financial documents are an attempt to solve the free-rider problem.

Question 22

A possible problem with Sarbanes-Oxley is that in worsens the free-rider problem for financial intermediaries.

Question 23

Specialized lending is intended to minimize adverse selection problems.

Question 24

Which of the following is a technique lenders use to alleviate the moral hazard problem?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 25

Which are examples of external finance?

A) issuing commercial paper
B) stock sales
C) issuing bonds
D) all of the above

Question 26

Diversified lending is intended to help alleviate agency problems.

Question 27

Which of the following does NOT involve a financial intermediary?

A) saving for retirement
B) buying a treasury bond from the government
C) buying stock online
D) all of the above

Question 28

Which of the following is a technique lenders use to alleviate moral hazard problems?

A) specialized lending
B) diversified lending
C) requiring collateral
D) all of the above

Question 29

Diversified lending is intended to minimize transactions costs.

Question 30

Which of the following is a technique lenders use to alleviate asymmetric information problems?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 31

Transactional costs are any and all costs associated with completing an exchange.

Question 32

Laws against fraudulent reporting on financial documents are an attempt to reduce agency problems.

Question 33

Which of the following is a technique lenders use to alleviate the adverse selection problem?

A) screening
B) monitoring borrower activity
C) legal restrictions on the use of funds
D) all of the above

Question 34

To mitigate agency problems, the incentives of the employees should be closed aligned with the employer.

Question 35

Most external financing comes from bonds and equities.

Question 36

A possible problem with Sarbanes-Oxley is that it increases transactions costs for financial intermediaries.

Question 37

Which of the following is an example of a source of internal finance?

A) corporate bonds
B) withheld earnings
C) commercial loans
D) none of the above

Question 38

Which of the following is a technique lenders use to alleviate asymmetric information problems?

A) specialized lending
B) diversified lending
C) requiring collateral
D) all of the above

Question 39

Which of the following does NOT involve a financial intermediary?

A) saving for retirement
B) taking a loan to start a business
C) buying stock online
D) none of the above

Question 40

Which of the following is a technique lenders use to alleviate the adverse selection problem?

A) checking credit ratings
B) monitoring borrower activity
C) restrictive covenants
D) all of the above

Question 41

Banks are said to ration credit when they refuse to lend above a certain interest rate. The purpose of such a policy is to minimize _____ of lending.

A) adverse selection problems
B) moral hazard problems
C) transactions costs
D) all of the above

Question 42

Efficiency wages are _____ the level firms would have to pay to fill all their open positions.

A) higher than
B) lower than
C) equal to
D) none of the above

Question 43

Asymmetric information:

A) decreases the efficiency of financial markets.
B) reduces the flow of funds to entrepreneurs.
C) injures the real economy
D) all of the above.

Question 44

Costly state verification means the same as

A) specialized lending.
B) agency costs.
C) monitoring.
D) all of the above.

Question 45

Legislation banning fraudulent financial documentation is intended to reduce

A) agency costs.
B) moral hazard problems.
C) asymmetric information.
D) all of the above.

Question 46

The free-rider problem affects decisions of participants in

A) the stock market.
B) internal finance
C) both of the above.
D) neither of the above.

Question 47

Which of the following is a technique lenders use to alleviate the moral hazard problem?

A) checking credit ratings
B) monitoring borrower activity
C) both of the above
D) none of the above

Question 48

Transactions costs are

A) broker commissions.
B) legal fees.
C) monitoring costs.
D) all of the above.

Question 49

Which of the following are examples of transactions costs faced by lenders?

A) accounting fees
B) legal fees
C) monitoring costs
D) all of the above

Question 50

Sarbanes-Oxley may have unintentionally increased

A) asymmetric information.
B) allocational efficiency.
C) transactions costs.
D) all of the above.

Question 51

Specialized lending helps lenders solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 52

The free-rider problem affects decisions of participants in

A) the stock market.
B) IPOs.
C) both of the above.
D) neither of the above.

Question 53

Restrictive covenants are required by lenders to help solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 54

The free-rider problem affects the

A) stock market.
B) corporate bond market.
C) both of the above.
D) neither of the above.

Question 55

Specialized lending helps lenders solve the problem of

A) adverse selection.
B) moral hazard.
C) transactions costs.
D) all of the above.

Question 56

Spinning, in relation to IPOs, is a practice that hurts

A) underwriters.
B) investors.
C) the company going public.
D) all of the above.

Question 57

Most external finance is channeled through intermediaries because of

A) asymmetric information.
B) agency costs.
C) monitoring costs.
D) none of the above.

Question 58

Sarbanes-Oxley was intended to reduce

A) asymmetric information.
B) allocational efficiency.
C) transactions costs.
D) all of the above.

Question 59

Deductibles on car insurance are solutions to the _____ problem for insurers.

A) adverse selection
B) moral hazard
C) free-rider
D) all of the above

Question 60

Firms that pay efficiency wages are attempting to minimize

A) agency costs.
B) moral hazard problems.
C) asymmetric information.
D) all of the above.

Question 61

During the housing crisis of 2008, many homeowners went "under water," meaning their home is worth less than the value of their mortgage. What solution to asymmetric information problems is affected? Why is this a problem for lenders?

Question 62

Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

Question 63

What transactions cost could arise from screening?

Question 64

What is the free-rider problem in relation to the stock market?

Question 65

Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

Question 66

What does IPO stand for? What is it?

Question 67

Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem, and which solves the adverse selection problem? Explain briefly.

Question 68

Credit rationing means that banks refuse to lend above a certain interest rate. Why would they do this? What does this policy have to do with adverse selection or moral hazard?

Question 69

How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

Question 70

Does screening help minimize adverse selection of moral hazard problems? Explain briefly.

Question 71

What are restrictive covenants? Are they directed at adverse selection or moral hazard problems?

Question 72

How do efficiency wages reduce agency costs?

Question 73

What are stock options?

Question 74

How does the free-rider problem affect the size of the firms with access to the IPO market?

Question 75

Give an example of monitoring and restrictive covenants the bank might require if you took a loan from a bank to open a clothing store.