Question 1

Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.

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Question 2

A bank advertises a very competitive loan interest rate.Explain what measures the bank can take to address adverse selection.

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Question 3

Most credit cards charge a relatively high rate of interest, yet many people carry them, including people who would be considered low-risk borrowers.Our discussion of adverse selection said that low-risk borrowers should have been discouraged from these.What gives?

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Question 4

Prosper.com is a San Francisco-based web site that facilitates peer-to-peer micro lending.If you were going to consider making a loan through Prosper, would you be more concerned about adverse selection or moral hazard, and why?

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Question 5

How did information asymmetries in the home mortgage market contribute to the financial crisis of 2007-2009?

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Question 6

The United States, the United Kingdom, Germany and Japan are all developed countries with highly developed and efficient financial markets.However, in all four countries the main source of business finance is internal funding.Why is this so?

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Question 7

A friend who is taking her first class in investments asks you why the regulatory bodies place so much emphasis on minimizing insider information if many of the potential problems associated with financial transactions stem from information asymmetry or a lack of information.How would you respond?

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Question 8

Explain the difference between a secured and an unsecured loan, and the interest rate you would expect to see charged on each (all other factors equal).

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Question 9

Explain why deflation can be so troubling to borrowers and lenders.

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Question 10

Explain what is likely to happen to the rate of mortgage loan default given the following: "For years home values across the country have increased on average 3 to 4% percent each year.Mortgage lenders have come to expect this to always be the case and so begin to offer mortgages with little to nothing down and not requiring PMI insurance.An economic slowdown occurs hitting a few areas of the country harder than others.Home values across the country begin to decrease with some areas seeing decreases of as much as 10%."

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Question 11

You have a friend that has run up a pretty large balance on his credit card.He mentions to you that he has missed a few payments but doesn't think it is that big of a deal since all it cost him is a little more interest on his balance.You tell him it may end up costing him a lot more that.He presses you for an explanation.Explain to him how his handling of this debt can impact what he pays for future debt.

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Question 12

It is not uncommon to read about highly successful mutual fund managers that spend considerable amounts of time visiting the companies that they have placed their clients' funds with.What might be the motive(s) behind these visits?

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Question 13

Respond to the following: "If it takes a significant period of time to uncover accounting manipulations by individuals in a major corporation, honesty may be the best policy but dishonesty can be a lot more profitable!"

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Question 14

If buyers cannot distinguish a good used car, worth $15,000, from a "lemon," worth $5000; explain what will happen to the market for used cars.

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Question 15

Private Mortgage Insurance (PMI) is often required by mortgage lenders when the borrowers have less than a 20% down payment.Link the requirement of PMI to the concepts of net worth, moral hazard, and transfer of risk.

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Question 16

Discuss the role that companies like Standard & Poor's, Dun & Bradstreet, and Moody's play in solving the problem of adverse selection.

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Question 17

Life insurance companies usually offer a lower premium to non-smokers than the premium charged to smokers.Discuss first the potential for adverse selection and moral hazard and then ways the company can seek to reduce or eliminate these problems.

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Quiz 11: The Economics of Financial Intermediation