Chapter 9

04 Jun Chapter 9

Chapter 9

1) Information costs

A) are the costs of buying and selling financial claims.

B) include the costs that savers incur to determine the credit worthiness of borrowers.

C) include the costs borrowers incur to discover the best investments to make with the money they have borrowed.

D) are zero in financial markets, but high for transactions carried out through financial intermediaries.

2) Which of the following is NOT an example of transactions costs?

A) high interest rates

B) lawyers’ fees

C) brokerage commissions

D) minimum investment requirements

3) The presence of information and transactions cost result in all of the following EXCEPT:

A) reduced efficiency of financial markets.

B) higher returns for savers

C) some funds not being lent at all

D) borrowers need to pay more for funds

4) Which of the following does NOT represent a way in which financial intermediaries take advantage of economies of scale?

A) paying lower brokerage fees per dollar invested

B) paying lower legal fees per dollar invested

C) purchasing sophisticated computer systems

D) paying lower taxes per dollar invested

5) Which of the following is NOT true of adverse selection?

A) It would not exist in a world of perfect information.

B) It arises because borrowers typically know more than lenders.

C) It describes a lender’s problem of distinguishing the good-risk applicants from the bad-risk applicants.

D) It describes a lender’s problem in verifying borrowers are using their funds as intended.

6) The “lemons problem” is overcome in the used car market by

A) strict government regulation of private deals between individual buyers and sellers of used cars.

B) most used cars selling for well below their true values.

C) “lemon insurance” policies being offered by insurance companies.

D) the existence of used car dealers who are concerned about maintaining their reputations.

7) Why is adverse selection more likely in financial markets when interest rates rise?

A) The remaining borrowers are more likely to be risky.

B) Higher interest rates are likely to hurt the economy.

C) If firms have to pay higher interest rates, they may choose to use the funds differently than they first intended.

D) Banks eliminate risky borrowers by raising interest rates.

8) Credit rationing refers to

A) the increase in the interest rate that occurs when the demand for credit increases.

B) the increase in the interest rate that occurs when the supply of credit increases.

C) the increase in the interest rate that occurs when the supply of credit decreases.

D) a restriction in the availability of credit.

9) Private information-collection firms fail to eliminate the adverse selection problem because

A) the law does not allow them to disclose private information about the creditworthiness of firms.

B) they do not monitor borrowers after loans have been made.

C) some investors who do not pay for their services will still profit from them.

D) most companies refuse to provide them with any information.

10) Lenders prefer to lend to firms with high net worth because

A) such firms are usually willing to pay higher interest rates.

B) the owners of such firms have more to lose if the firm defaults on a loan.

C) the government requires most bank loans to be made to such firms.

D) such firms usually are unable to raise funds directly through financial markets.

11) A firm’s principals are its

A) shareholders.

B) management.