FMT tutorial 6

The largest source of external funds for U.S. firms is:

• bonds.

• loans.

• stocks

• trade debts

Asymmetric information occurs when

• each party has equal information

• one party in a transaction has more influence than another.

• each party in a transaction gains from the transaction.

• each party has equal information

A bad credit risk seeks out loans more actively. This is a(n):

• liquidity problem

• principal-agent problem.

• moral hazard problem.

• adverse selection problem.

A borrower engages in activities that are undesirable from a lender's point of view. This is the:

• adverse selection problem.

• transaction costs problem.

• liquidity problem.

• moral hazard problem.

The free-rider problem

• will only occur if information costs are zero.

• will make more people willing to provide information services.

• is that people who do not pay for information take advantage of information other people have paid for.

• makes it easier for an investor to continue to buy securities at less than the true value.

The principal-agent problem

• occurs because owners have complete information about managers.

• is a type of moral hazard.

• is not related to asymmetric information.

• eliminates costly state verification.

When interest rates are high, lenders may not want to make loans because of:

• adverse selection.

• moral hazard.

• the principal-agent problem.

• costly state verification.

A venture capital firm:

• allows equity shares of the new firm to be sold in the marketplace.

• increases the size of the moral hazard problem.

• pools resources to help entrepreneurs start new firms.

• has no say in the management of the new firm.

Which of the following describes the "lemons problem?"

• Sellers have more information than buyers and more transactions occur.

• Sellers have more information than buyers and few transactions occur.

• Buyers have more information than sellers and more transactions occur.

• Buyers have more information than sellers and few transactions occur.

By taking advantage of economies of scale and developing expertise, financial intermediaries overcome the problem of:

• adverse selection.

• high transaction cost

• free-riding.

• moral hazard.