Financial Markets and Institutions, 8e (Mishkin)
1) Of the following sources of external finance for American nonfinancial businesses, the least
important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) nonbank loans.
2) Of the following sources of external finance for American nonfinancial businesses, the most
important is
A) loans from banks.
B) stocks.
C) bonds and commercial paper.
D) nonbank loans.
3) Of the sources of external funds for nonfinancial businesses in the United States, bonds
account for approximately ________ of the total.
A) 10%
B) 20%
C) 30%
D) 50%
4) Of the sources of external funds for nonfinancial businesses in the United States, stocks
account for approximately ________ of the total.
A) 10%
B) 20%
C) 30%
D) 40%
5) With regard to external sources of financing for nonfinancial businesses in the United States,
which of the following are accurate statements?
A) Marketable securities account for a larger share of external business financing in the United
States than in most other countries.
B) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been
sold directly to American households.
C) The stock market accounted for the largest share of the financing of American businesses in
the 1970-2000 period.
D) All of the above.
E) Only A and B of the above.
6) With regard to external sources of financing for nonfinancial businesses in the United States,
which of the following are accurate statements?
A) Direct finance is used in less than 5% of the external financing of American businesses.
B) Only large, well-established corporations have access to securities markets to finance their
activities.
C) Loans from banks and other financial intermediaries in the United States provide five times
more financing of corporate activities than do stock markets.
D) All of the above.
E) Only A and B of the above.
7) (I) In the United States, nonbank loans are the most important source of external funds for
nonfinancial businesses.
(II) In Germany and Japan, issuing stocks and bonds is the most important source of external for
nonfinancial businesses.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
8) Which of the following is not one of the eight basic facts about financial structure?
A) Debt contracts are typically extremely complicated legal documents that place substantial
restrictions on the behavior of the borrower.
B) Indirect finance, which involves the activities of financial intermediaries, is many times more
important than direct finance in which businesses raise funds directly from lenders in financial
markets.
C) Collateral is a prevalent feature of debt contracts for both households and businesses.
D) New security issues is the most important source of external funds to finance businesses.
9) Which of the following is not one of the eight basic facts about financial structure?
A) The financial system is among the most heavily regulated sectors of the economy.
B) Issuing marketable securities is the primary way businesses finance their operations.
C) Indirect finance, which involves the activities of financial intermediaries, is many times more
important than direct finance in which businesses raise funds directly from lenders in financial
markets.
D) Financial intermediaries is the most important source of external funds to finance businesses.
10) Because information is scarce,
A) equity contracts are used much more frequently to raise capital than are debt contracts.
B) monitoring managers gives rise to costly state verification.
C) government regulations, such as standard accounting principles, can help reduce moral
hazard.
D) all of the above are true.
E) only B and C of the above are true.
11) Which of the following best explains the recent decline in the role of financial
intermediaries?
A) Private production and sale of information
B) Government regulation to increase information
C) Improvements in information technology
D) None of the above can explain the recent decline
12) (I) The total cost of carrying out a transaction in financial markets increases proportionally
with the size of the transaction.
(II) Financial intermediaries facilitate diversification when an investor has only a small sum to
invest.
A) (I) is true; (II) false.
B) (I) is false; (II) true.
C) Both (I) and (II) are true.
D) Both (I) and (II) are false.
13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them
from financial intermediaries, then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification.
14) If borrowers take on big risks after obtaining a loan, then lenders face the problem of
A) free-riding.
B) adverse selection.
C) moral hazard.
D) costly state verification.
15) Because of the lemons problem in the used car market, the average quality of the used cars
offered for sale will be ________, which gives rise to the problem of ________.
A) low; moral hazard
B) low; adverse selection
C) high; moral hazard
D) high; adverse selection
16) In the used car market, asymmetric information leads to the lemons problem because the
price that buyers are willing to pay will
A) reflect the highest quality of used cars in the market.
B) reflect the lowest quality of used cars in the market.
C) reflect the average quality of used cars in the market.
D) none of the above.
17) The problem created by asymmetric information before the transaction occurs is called
________, while the problem created after the transaction occurs is called ________.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) costly state verification; free-riding
D) free-riding; costly state verification
18) A borrower who takes out a loan usually has better information about the potential returns
and risks of the investment projects he plans to undertake than the lender does. This inequality of
information is called
A) moral hazard.
B) asymmetric information.
C) noncollateralized risk.
D) adverse selection.
19) Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender’s relative lack of information about the borrower’s potential returns and risks of his
investment activities.
B) the lender’s inability to legally require sufficient collateral to cover a 100 percent loss if the
borrower defaults.
C) the borrower’s lack of incentive to seek a loan for highly risky investments.
D) none of the above.
20) Moral hazard is a problem associated with debt and equity contracts arising from
A) the borrower’s incentive to undertake highly risky investments.
B) the owners’ inability to ensure that managers will act in the owners’ interest.
C) the difficulty lenders have in sorting out good credit risks from bad credit risks.
D) all of the above.
E) only A and B of the above.
21) Because of the adverse selection problem,
A) lenders may make a disproportionate amount of loans to bad credit risks.
B) lenders may refuse loans to individuals with low net worth.
C) lenders are reluctant to make loans that are not secured by collateral.
D) all of the above.
22) The ________ problem occurs when people who do not pay for information take advantage
of the information that other people have paid for.
A) free-rider
B) moral hazard
C) adverse selection
D) lemons
23) Because of the adverse selection problem,
A) good credit risks are more likely to seek loans, causing lenders to make a disproportionate
amount of loans to good credit risks.
B) lenders may refuse loans to individuals with high net worth, because of their greater proclivity
to “skip town.”
C) lenders are reluctant to make loans that are not secured by collateral.
D) all of the above.
24) The problem of adverse selection helps to explain
A) why banks prefer to make loans secured by collateral.
B) why banks have a comparative advantage in raising funds for American businesses.
C) why borrowers are willing to offer collateral to secure their promises to repay loans.
D) all of the above.
E) only A and B of the above.
25) The problem of adverse selection helps to explain
A) which firms are more likely to obtain funds from banks and other financial intermediaries,
rather than from securities markets.
B) why collateral is an important feature of consumer, but not business, debt contracts.
C) why direct finance is more important than indirect finance as a source of business finance.
D) only A and B of the above.
26) When an accounting firm conducts on independent audit, the accounting firms certify that
A) the firm is adhering to standard accounting principles and disclosing accurate information
about sales, assets, and earnings.
B) the firm is adhering to federal regulations with regard to product safety, hiring practices, and
environmental regulations.
C) the firm’s management is qualified to conduct the firm’s business in the best interest of share
holders.
D) All of the above are correct answers.
27) The concept of adverse selection helps to explain
A) why collateral is not a common feature of many debt contracts.
B) why large, well-established corporations find it so difficult to borrow funds in securities
markets.
C) why financial markets are among the most heavily regulated sectors of the economy.
D) all of the above.
28) That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that
these intermediaries
A) have been afforded special government treatment, since used car dealers do not provide
information that is valued by consumers of used cars.
B) are able to prevent potential competitors from free-riding off the information that they
provide.
C) have failed to solve adverse selection problems in this market because “lemons” continue to
be traded.
D) do all of the above.
29) That most used cars are sold by intermediaries (i.e., used car dealers) provides evidence that
these intermediaries
A) provide information that is valued by consumers of used cars.
B) are able to prevent others from free-riding off the information that they provide.
C) can profit by becoming experts in determining whether an automobile is a good car or a
lemon.
D) do all of the above.
30) A key finding of the economic analysis of financial structure is that
A) the existence of the free-rider problem for traded securities helps to explain why banks play a
predominant role in financing the activities of businesses.
B) while free-rider problems limit the extent to which securities markets finance some business
activities, the majority of funds going to businesses are channeled through securities markets.
C) given the great extent to which securities markets are regulated, free-rider problems are not of
significant economic consequence in these markets.
D) economists do not have a very good explanation for why securities markets are so heavily
regulated.
31) In the United States, the government agency requiring that firms, which sell securities in
public markets, adhere to standard accounting principles and disclose information about their
sales, assets, and earnings is the
A) Federal Corporate Securities Commission.
B) Federal Trade Commission.
C) Securities and Exchange Commission.
D) U.S. Treasury Department.
E) Federal Reserve System.
32) An audit certifies that
A) a firm’s loans will be repaid.
B) a firm’s securities are safe investments.
C) a firm abides by standard accounting principles.
D) the information reported in a firm’s accounting statements is correct.
33) The authors’ analysis of adverse selection indicates that financial intermediaries in general,
and banks in particular (because they hold a large fraction of nontraded loans),
A) have advantages in overcoming the free-rider problem, helping to explain why indirect
finance is a more important source of business finance than direct finance.
B) play a greater role in moving funds to corporations than do securities markets as a result of
their ability to overcome the free-rider problem.
C) provide better-known and larger corporations a higher percentage of their external funds than
they do to newer and smaller corporations, which rely to a greater extent on the new issues
market for funds.
D) all of the above.
E) only A and B of the above.
34) The authors’ analysis of adverse selection indicates that financial intermediaries
A) overcome free-rider problems by holding nontraded loans.
B) must buy securities from corporations to diversify the risk that results from holding
nontradable loans.
C) have not been very successful in dealing with adverse selection problems in financial markets.
D) do all of the above.
E) do only A and B of the above.
35) The pecking order hypothesis predicts that the ________ a corporation is, the more likely it
will be to ________.
A) smaller and less well known; issue securities
B) larger and more well known; borrow from financial intermediaries
C) larger and more well known; issue securities
D) smaller and less well known; need external financing
36) Financial intermediaries (banks in particular) have the ability to avoid the free-rider problem
as long as they primarily
A) make private loans.
B) acquire a diversified portfolio of stocks.
C) buy junk bonds.
D) do a balanced combination of A and B of the above.
37) Property that is pledged to the lender in the event that a borrower cannot make his or her debt
payment is called
A) points.
B) interest.
C) collateral.
D) good faith money.