281. When the potential borrowers who are the most likely to default are the ones most actively seeking a loan, _ is said to exist.
A. asymmetric information
B. adverse selection
C. moral hazard
D. fraud
Answer
B. adverse selection
282. When the borrower engages in activities that make it less likely that the loan will be repaid, is said to exist.
A. asymmetric information
B. adverse selection
C. moral hazard
D. fraud
Answer
C. moral hazard
283. The concept of adverse selection helps to explain
A. which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets.
B. why indirect finance is more important than direct finance as a source of business finance.
C. why direct finance is more important than indirect finance as a source of business finance.
D. only (A) and (B) of the above.
Answer
D. only (A) and (B) of the above.
284. 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.
Answer
A. the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.
285. When the least desirable credit risks are the ones most likely to seek loans, lenders are subject to the
A. moral hazard problem.
B. adverse selection problem.
C. shirking problem.
D. free-rider problem.
Answer
B. adverse selection problem.
286. Financial institutions expect that
A. moral hazard will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
B. opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
C. 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
Answer
B. opportunistic behavior will occur, as the least desirable credit risks will be the ones most likely to seek out loans.
287. 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
A. moral hazard.
B. adverse selection.
C. bad luck.
D. financial panics.
Answer
B. adverse selection.
288. In financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called
A. comparative informational disadvantage.
B. asymmetric information
C. variant information.
D. caveatvenditor.
Answer
B. asymmetric information
289. The largest depository institution at the end of 2001 was
A. life insurance companies.
B. pension funds.
C. state retirement funds.
D. none of the above.
Answer
D. none of the above.
290. The value of assets held by commercial banks in 2001 was $6.7 trillion dollars, making commercial banks the
A. second most important sector of financial intermediaries after mutual funds.
B. second most important sector of financial intermediaries after lifeinsurance companies.
C. second most important sector of financial intermediaries after privatepension funds.
D. largest sector of financial intermediaries.
Answer
D. largest sector of financial intermediaries.
291. Which of the following financial intermediaries are depository institutions?
A. A savings and loan association
B. A commercial bank
C. A credit union
D. All of the above
Answer
D. All of the above
292. Which of the following is a contractual savings institution?
A. A life insurance company
B. A credit union
C. A savings and loan association
D. A mutual fund
Answer
A. A life insurance company
293. Which of the following are not investment intermediaries?
A. A life insurance company
B. A pension fund
C. A mutual fund
D. Only (A) and (B) of the above
Answer
D. Only (A) and (B) of the above
294. The government regulates financial markets for three main reasons:
A. to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.
B. 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.
C. 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.
D. 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.
Answer
A. to ensure soundness of the financial system, to improve control of monetary policy, and to increase the information available to investors.
295. Asymmetric information can lead to widespread collapse of financial intermediaries, referred to as a
A. bank holiday.
B. financial panic.
C. financial disintermediation.
D. financial collapse.
Answer
B. financial panic.
296. The market value size of outstanding instruments of capital markets depends on factors
A. primary cash flows
B. number of issued securities
C. market prices of securities
D. both b and c
Answer
D. both b and c
297. When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as
A. interest rate risk
B. channel rate risk
C. economic risk
D. issuance risk
Answer
A. interest rate risk
298. The depository institutions includes
A. mutual funds
B. commercial banks and thrifts
C. savings banks
D. credit unions
Answer
B. commercial banks and thrifts
299. The major liabilities of the commercial banks are
A. junk bonds
B. deposits
C. loans
D. swap bonds
Answer
B. deposits
300. The money market where securities are issued by governments to obtain funds for short term is classified as
A. money market instruments
B. capital market instruments
C. counter instruments
D. long term instruments
Answer
A. money market instruments
301. The federal funds, bankers acceptance, commercial paper and repurchase agreements are classified as
A. counter instruments
B. long term instruments
C. money market instruments
D. capital market instruments
Answer
C. money market instruments
302. In financial transactions, the risk that there will be no profit in selling of this assetis classified as
A. price risk
B. profit risk
C. selling risk
D. financial risk
Answer
A. price risk
303. The type of risk in which the value of liabilities and assets is affected by the exchange rate is classified a
A. economic rates
B. foreign exchange risk
C. selling rate
D. buying rates
Answer
B. foreign exchange risk
304. In commercial banks, the subordinate debentures and subordinate notes are considered as
A. stated rates
B. banks debentures
C. banks liabilities
D. banks deposits
Answer
C. banks liabilities
305. The type of financial security having payoffs which are connected to some securities Issued some time back is classified as
A. linked security
B. previous security
C. payoff security
D. derivative security
Answer
D. derivative security
306. A bond whose coupon rate is below the current market rate of interest will have a price:
A. more than its maturity value of Rs.100.
B. less than its maturity value.
C. equal to its maturity value
D. none
Answer
C. equal to its maturity value
307. A widening of the difference between the return on corporate bonds and on government bonds might suggest which of the following?
A. The economy is on the brink of recession.
B. Interest rates are going to rise in future.
C. Government bonds are becoming more risky compared to corporate bonds.
D. Investors should avoid government bonds.
Answer
A. The economy is on the brink of recession.
308. In a situation where share prices are generally depressed because long-term interest rates are expected to rise in future, a large firm looking for long-term finance would normally consider:
A. issuing long-dated bonds.
B. making a new share issue.
C. borrowing from its bank on overdraft.
D. borrowing in the interbank market.
Answer
A. issuing long-dated bonds.
309. Using a supply and demand framework, what is likely to happen to share prices in general if the central bank unexpectedly raises interest rates?
A. The demand curve shifts to the left.
B. The supply curve shifts to the left.
C. Both curves shift outwa
Answer
A. The demand curve shifts to the left.
310. Using a supply and demand framework, what is likely to happen to share prices in general if the central bank raises interest rates in response to a fall in the exchange rate?
A. The supply curve shifts to the left.
B. No changes.
C. Both curves shift inwa
Answer
B. No changes.
311. Which of the following actions might you expect lenders to take during periods of variable and unpredictable inflation?
A. Reduce the amount of lending they are prepared to do.
B. Increase the average length of loans they are willing to make.
C. Increase the amount of lending they are prepared to do.
D. Reduce the average length of loans they are willing to make.
Answer
D. Reduce the average length of loans they are willing to make.
312. In the ‘walking stick’ hypothesis, the yield curve slopes:
A. down and then up
B. down
C. up
D. up and then down
Answer
D. up and then down
313. Secondary markets
A. engage in buying and selling that is out of the public view.
B. are where governments go to finance ongoing operations.
C. include centralized exchanges, over-the-counter markets, and electronic communication networks.
D. include all of the above.
Answer
C. include centralized exchanges, over-the-counter markets, and electronic communication networks.
314. Financial institutions:
A. provide access to the financial markets.
B. are also known as financial intermediaries.
C. include banks, insurance companies, securities firms, and pension funds.
D. include all of the above.
Answer
B. are also known as financial intermediaries.
315. Debt markets:
A. are markets for money.
B. are markets for bonds, loans, and mortgages.
C. are markets for stocks.
D. are markets for either stocks or bonds.
Answer
B. are markets for bonds, loans, and mortgages.
316. Centralized exchanges:
A. are electronic systems that bring buyers and sellers together for electronic execution.
B. are markets where claims based on an underlying asset are traded for payment at a later date.
C. are markets where financial claims are bought and sold for immediate cash payment.
D. are secondary markets where buyers and sellers meet in the same location.
Answer
D. are secondary markets where buyers and sellers meet in the same location.
317. Debt and equity markets:
A. are markets where financial claims are bought and sold for immediate cash payments.
B. are decentralized secondary markets where dealers stand ready to buy and sell securities electronically.
C. are markets where newly issued securities are so
Answer
A. are markets where financial claims are bought and sold for immediate cash payments.
318. The internal rate of return is:
A. the interest rate at which money is borrowed for investment.
B. the interest that allows a profit.
C. profit divided by investment amount.
D. the interest rate that equates the present value of an investment with its cost.
Answer
D. the interest rate that equates the present value of an investment with its cost.
319. Coupon bonds:
A. require borrowers to pay the lender coupon payments until maturity, when the borrower pays the principle.
B. require borrowers to pay lenders coupon payments until maturity.
C. require borrowers to pay lenders principle and interest at maturity.
D. require only interest payments until maturity when principle and interest are paid.
Answer
A. require borrowers to pay the lender coupon payments until maturity, when the borrower pays the principle.
320. The present value of a coupon bond is:
A. the present value of the coupon payments plus the future value of the principle payment.
B. the sum of the coupon payments and the principle payment.
C. the sum of the coupon payments.
D. the present value of the coupon payments and the present value of the principle payment.
Answer
D. the present value of the coupon payments and the present value of the principle payment.
