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This set of Financial Markets and Institutions Multiple Choice Questions & Answers (MCQs) focuses on Financial Markets And Institutions Set 12

Q1 | Investment banking was developed by
  • Japan
  • England
  • USA
  • None of the above
Q2 | The presence of transaction costs in financial markets explains, in part, why
  • financial intermediaries and indirect finance play such an important role in financial markets.
  • equity and bond financing play such an important role in financial markets.
  • corporations get more funds through equity financing than they get from financial intermediaries.
  • direct financing is more important than indirect financing as a source of funds.
Q3 | Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of
  • poorly informed consumers.
  • standardization.
  • economies of scale.
  • their market power.
Q4 | The presence of in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.
  • noncollateralized risk
  • free-riding
  • asymmetric information
  • costly state verification
Q5 | When the lender and the borrower have different amounts of information regarding a transaction,__________
  • asymmetric information
  • adverse selection
  • moral hazard
  • fraud
Q6 | When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _ is said to exist.
  • asymmetric information
  • adverse selection
  • moral hazard
  • fraud
Q7 | When the borrower engages in activities that make it less likely that the loan will be repaid, is said to exist.
  • asymmetric information
  • adverse selection
  • moral hazard
  • fraud
Q8 | The concept of adverse selection helps to explain
  • which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
  • why indirect finance is more important than direct finance as a source of business finance.
  • why direct finance is more important than indirect finance as a source of business finance.
  • only (A) and (B) of the above.
Q9 | 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.
  • the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults.
  • the borrower’s lack of incentive to seek a loan for highly risky investments.
  • none of the above.
Q10 | When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the
  • moral hazard problem.
  • adverse selection problem.
  • shirking problem.
  • free-rider problem.
Q11 | Financial institutions expect that
  • moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
  • opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
  • borrowers will commit moral hazard by taking on too much risk, and this is what drives financial institutions to take steps to limit moral haza
Q12 | Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to
  • moral hazard.
  • adverse selection.
  • bad luck.
  • financial panics.
Q13 | In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called
  • comparative informational disadvantage.
  • asymmetric information
  • variant information.
  • caveatvenditor.
Q14 | The largest depository institution at the end of 2001 was
  • life insurance companies.
  • pension funds.
  • state retirement funds.
  • none of the above.
Q15 | The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the
  • second most important sector of financial intermediaries after mutual funds.
  • second most important sector of financial intermediaries after lifeinsurance companies.
  • second most important sector of financial intermediaries after privatepension funds.
  • largest sector of financial intermediaries.
Q16 | Which of the following financial intermediaries are depository institutions?
  • A savings and loan association
  • A commercial bank
  • A credit union
  • All of the above
Q17 | Which of the following is a contractual savings institution?
  • A life insurance company
  • A credit union
  • A savings and loan association
  • A mutual fund
Q18 | Which of the following are not investment intermediaries?
  • A life insurance company
  • A pension fund
  • A mutual fund
  • Only (A) and (B) of the above
Q19 | The government regulates financial markets for three main reasons:
  • to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.
  • to improve control of monetary policy, to ensure that financial intermediaries earn a normal rate of return, and to increase the information available to investors.
  • to ensure that financial intermediaries do not earn more than the normal rate of return, to ensure soundness of the financial system, and to improve control of monetary policy.
  • to ensure soundness of financial intermediaries, to increase the information available to investors, and to prevent financial intermediaries from earning less than the normal rate of return.
Q20 | Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a
  • bank holiday.
  • financial panic.
  • financial disintermediation.
  • financial collapse.
Q21 | The market value size of outstanding instruments of capital markets depends on factors
  • primary cash flows
  • number of issued securities
  • market prices of securities
  • both b and c
Q22 | When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as
  • interest rate risk
  • channel rate risk
  • economic risk
  • issuance risk
Q23 | The depository institutions includes
  • mutual funds
  • commercial banks and thrifts
  • savings banks
  • credit unions
Q24 | The major liabilities of the commercial banks are
  • junk bonds
  • deposits
  • loans
  • swap bonds
Q25 | The money market where securities are issued by governments to obtain funds for short term is classified as
  • money market instruments
  • capital market instruments
  • counter instruments
  • long term instruments