Question 1

The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts.
A)adverse selection
B)transactions costs
C)moral hazard
D)loan amounts

Accepted Answer

Collateral and restrictive covenants are used to reduce moral hazard in debt contracts. Moral hazard occurs when the borrower has an incentive to take excessive risk because they don't bear the full cost of the potential losses. Collateral and covenants shift some of the risk back to the borrower, reducing the incentive to take excessive risk. Adverse selection and transactions costs are also important considerations in debt contracts, but collateral and covenants are specifically used to address the problem of moral hazard. Loan amounts are not directly related to the use of collateral and covenants.

Question 2

Due in part to record low interest rates on U.S. Treasury Bonds,
A)investors searching for higher yields bought corporate bonds
B)interest rates on corporate bonds rose
C)corporations faced higher borrowing costs
D)many corporations were at greater risk of defaulting

Accepted Answer

When interest rates on U.S. Treasury bonds are low, investors look for other options to get higher yields. In this case, investors moved away from U.S. Treasury bonds and bought corporate bonds, which offer higher yields. The higher demand for corporate bonds led to lower interest rates for corporations, making it easier for them to borrow money.

Question 3

Which of the following concerns were raised as a result of record low interest rates in 2012?
A)high perceived risk of default
B)high interest rate risk
C)corporations facing a lack of demand for bonds
D)high risk premiums on investment-grade corporate bonds

Accepted Answer

The answer of Which of the following concerns were raised...

Question 4

Why are corporations more likely to raise funds externally by debt instead of equity?
A)moral hazard is less of a problem with debt contracts
B)transactions costs tend to be higher in the stock market than bond market
C)to avoid paying dividends
D)interest rates tend to be lower than dividend rates

Accepted Answer

The answer of Why are corporations more likely to raise...

Question 5

By reducing transactions and information costs, financial intermediaries can
A)offer savers higher interest rates.
B)offer borrowers lower interest rates.
C)earn a profit.
D)all of the above.

Accepted Answer

By reducing transactions and information costs, financial intermediaries are able to offer savers higher interest rates and borrowers lower interest rates. This allows them to earn a profit by charging a higher interest rate to borrowers than they pay to savers. Therefore, all of the above choices are correct.

Question 6

Which of the following is the most important source of external financing for corporations?
A)stock market
B)bond market
C)retained earnings
D)mortgages

Accepted Answer

The bond market is the most important source of external financing for corporations because it allows companies to raise large amounts of capital by selling bonds to investors. Bondholders are typically paid interest on their investment and then receive the bond's face value at maturity. This form of financing can be less costly than other sources such as the stock market, which is more volatile and requires more administrative and regulatory expenses. Retained earnings and mortgages are internal sources of financing and may not provide sufficient funds to support large-scale corporate activities.

Question 7

What are the three key features of the financial system that result from the existence of transactions and information costs?

Accepted Answer

The answer of What are the three key features of...

Quiz 9: Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The purpose of collateral and restrictive covenants is to reduce ________ in debt contracts.

Due in part to record low interest rates on U.S. Treasury Bonds,

Which of the following concerns were raised as a result of record low interest rates in 2012?

Why are corporations more likely to raise funds externally by debt instead of equity?

By reducing transactions and information costs, financial intermediaries can

Which of the following is the most important source of external financing for corporations?

What are the three key features of the financial system that result from the existence of transactions and information costs?