Chapter 8 Exam 2

Of the following sources of external finance for American nonfinancial? businesses, the least important is

Stocks

Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are? true?

Regulation of the financial system

ensures the stability of the financial system.

restrictive covenant

Which firms are most likely to use bank financing rather than to issue bonds or stocks to finance their? activities?

Which of the following statements is? true?

Which of the following is not a benefit to an individual purchasing a mutual? fund?

liquidity

The problem created by asymmetric information before the transaction occurs is called? ________, while the problem created after the transaction occurs is called? ________.

adverse? selection; moral hazard

asymmetric information

adverse selection

moral hazard

agency

yes

Would you be more willing to lend to a friend if she put all of her life savings into her business than you would if she had not done? so?

You would be more willing because putting her life savings into her business provides you protection against the problem of moral hazard

How can the existence of asymmetric information provide a rationale for government regulation of financial? markets?

The production of information to combat these asymmetries is subject to the? free-rider problem

Adverse selection is a problem associated with equity and debt contracts arising from

the? lender's relative lack of information about the? borrower's potential returns and risks of his investment activities.

Analysis of adverse selection indicates that financial? intermediaries, especially? banks,

As information technology? improves, the lending role of financial institutions such as banks should? ________.

decrease

collateral

A problem for equity contracts is a particular type of? ________ called the? ________ problem.

agents; principals

The name economists give the process by which stockholders gather information by frequent monitoring of the? firm's activities is

Government regulations designed to reduce the moral hazard problem include

A debt contract is incentive compatible

if the borrower has the incentive to behave in the way that the lender expects and? desires, since doing otherwise jeopardizes the? borrower's net worth in the business.

restrictive covenants