Chapter 14 Theory of Financial Structure.docx
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Chapter14TheoryofFinancialStructure
Chapter14TheoryofFinancialStructure
14.1MultipleChoiceQuestions
1）OfthefollowingsourcesofexternalfinanceforAmericannonfinancialbusinesses,
theleastimportantis
A）loansfrombanks.
B）stocks.
C）bondsandcommercialpaper.
D）loansfromotherfinancialintermediaries.
Answer:
B
2）OfthefollowingsourcesofexternalfinanceforAmericannonfinancialbusinesses,
themostimportantis
A）loansfrombanks.
B）stocks.
C）bondsandcommercialpaper.
D）loansfromotherfinancialintermediaries.
Answer:
A
3）OfthesourcesofexternalfundsfornonfinancialbusinessesintheUnitedStates,
corporatebondsandcommercialpaperaccountforapproximately_____ofthe
total.
A）35percent
B）10percent
C）50percent
D）5percent
Answer:
A
4）OfthesourcesofexternalfundsfornonfinancialbusinessesintheUnitedStates,
stocksaccountforapproximately_____ofthetotal.
A）10percent
B）20percent
C）30percent
D）40percent
Answer:
A
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5）Withregardtoexternalsourcesoffinancingfornonfinancialbusinessesinthe
UnitedStates,whichofthefollowingareaccuratestatements?
A）Marketablesecuritiesaccountforalargershareofexternalbusinessfinancing
intheUnitedStatesthaninmostothercountries.
B）Since1970,lessthan5percentofnewlyissuedcorporatebondsand
commercialpaperhavebeensolddirectlytoAmericanhouseholds.
C）Thestockmarketaccountedforasizeablefractionofthefinancingof
Americanbusinessesinthe1970-1996period.
D）Alloftheabove.
E）Only（A）and（B）oftheabove.
Answer:
E
6）Withregardtoexternalsourcesoffinancingfornonfinancialbusinessesinthe
UnitedStates,whichofthefollowingareaccuratestatements?
A）Directfinanceisusedinlessthan5percentoftheexternalfinancingof
Americanbusinesses.
B）Onlylarge,well-establishedcorporationshaveaccesstosecuritiesmarketsto
financetheiractivities.
C）BankloansintheUnitedStatesprovidefourtimesmorefinancingofcorporate
activitiesthandostockmarkets.
D）Alloftheabove.
E）Only（A）and（B）oftheabove.
Answer:
D
7）（I）IntheUnitedStatesbankloansarethemostimportantsourceofexternalfunds
fornonfinancialbusinesses.（II）InGermanyandJapan,issuingstocksandbondsis
themostimportantsourceofexternalfornonfinancialbusinesses.
A）（I）istrue,（II）false.
B）（I）isfalse,（II）true.
C）Botharetrue.
D）Botharefalse.
Answer:
A
8）Whichofthefollowingisnotoneoftheeightbasicfactsaboutfinancialstructure?
A）Debtcontractsaretypicallyextremelycomplicatedlegaldocumentsthatplace
substantialrestrictionsonthebehavioroftheborrower.
B）Indirectfinance,whichinvolvestheactivitiesoffinancialintermediaries,is
manytimesmoreimportantthandirectfinance,inwhichbusinessesraise
fundsdirectlyfromlendersinfinancialmarkets.
C）Collateralisaprevalentfeatureofdebtcontractsforbothhouseholdsand
business.
D）Newsecurityissuesarethemostimportantsourceofexternalfundstofinance
businesses.
Answer:
D
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9）Whichofthefollowingisnotoneoftheeightbasicfactsaboutfinancialstructure?
A）Thefinancialsystemisamongthemostheavilyregulatedsectorsofthe
economy.
B）Issuingmarketablesecuritiesistheprimarywaybusinessesfinancetheir
operations.
C）Indirectfinance,whichinvolvestheactivitiesoffinancialintermediaries,is
manytimesmoreimportantthandirectfinance,inwhichbusinessesraise
fundsdirectlyfromlendersinfinancialmarkets.
D）Banksarethemostimportantsourceofexternalfundstofinancebusinesses.
Answer:
B
10）Becauseinformationisscarce,
A）equitycontractsareusedmuchmorefrequentlytoraisecapitalthanaredebt
contracts.
B）monitoringmanagersgivesrisetocostlystateverification.
C）governmentregulations,suchasstandardaccountingprinciples,canhelp
reducemoralhazard.
D）alloftheabovearetrue.
E）only（B）and（C）oftheabovearetrue.
Answer:
E
11）Whichofthefollowingbestexplainstherecentdeclineintheroleoffinancial
intermediaries?
A）Privateproductionandsaleofinformation
B）Governmentregulationtoincreaseinformation
C）Improvementsininformationtechnology
D）Noneoftheabovecanexplaintherecentdecline
Answer:
C
12）Ifbadcreditrisksaretheoneswhomostactivelyseekloansand,therefore,receive
themfromfinancialintermediaries,thenfinancialintermediariesfacetheproblem
of
A）moralhazard.
B）adverseselection.
C）free-riding.
D）costlystateverification.
Answer:
B
13）Ifborrowerstakeonbigrisksafterobtainingaloan,thenlendersfacetheproblem
of
A）moralhazard.
B）free-riding.
C）adverseselection.
D）costlystateverification.
Answer:
A
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14）Becauseofthelemonsproblemintheusedcarmarket,theaveragequalityofthe
usedcarsofferedforsalewillbe______,whichgivesrisetotheproblemof
______.
A）low;moralhazard
B）low;adverseselection
C）high;moralhazard
D）high;adverseselection
Answer:
B
15）Intheusedcarmarket,asymmetricinformationleadstothelemonsproblem
becausethepricethatbuyersarewillingtopaywill
A）reflectthehighestqualityofusedcarsinthemarket.
B）reflectthelowestqualityofusedcarsinthemarket.
C）reflecttheaveragequalityofusedcarsinthemarket.
D）noneoftheabove.
Answer:
C
16）Theproblemcreatedbyasymmetricinformationbeforethetransactionoccursis
called_____,whiletheproblemcreatedafterthetransactionoccursiscalled_____
A）adverseselection;moralhazard.
B）moralhazard;adverseselection.
C）costlystateverification;free-riding.
D）free-riding;costlystateverification.
Answer:
A
17）Aborrowerwhotakesoutaloanusuallyhasbetterinformationaboutthepotential
returnsandriskoftheinvestmentprojectsheplanstoundertakethandoesthe
lender.Thisinequalityofinformationiscalled
A）moralhazard.
B）asymmetricinformation.
C）noncollateralizedrisk.
D）adverseselection.
Answer:
B
18）Adverseselectionisaproblemassociatedwithequityanddebtcontractsarising
from
A）thelender’srelativelackofinformationabouttheborrower’spotentialreturns
andrisksofhisinvestmentactivities.
B）thelender’sinabilitytolegallyrequiresufficientcollateraltocovera100
percentlossiftheborrowerdefaults.
C）theborrower’slackofincentivetoseekaloanforhighlyriskyinvestments.
D）noneoftheabove.
Answer:
A
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19）Moralhazardisaproblemassociatedwithdebtandequitycontractsarisingfrom
A）theborrower’sincentivetotakehighlyriskyinvestments.
B）theowners’inabilitytoensurethatmanagerswillactintheowners’interest.
C）thedifficultylendershaveinsortingoutgoodcreditrisksfrombadcreditrisks.
D）alloftheabove.
E）only（A）and（B）oftheabove.
Answer:
E
20）Becauseoftheadverseselectionproblem,
A）lendersmaymakeadisproportionateamountofloanstobadcreditrisks.
B）lendersmayrefuseloanstoindividualswithlownetworth.
C）lendersarereluctanttomakeloansthatarenotsecuredbycollateral.
D）alloftheabove.
Answer:
D
21）Becauseoftheadverseselectionproblem,
A）goodcreditrisksaremorelikelytoseekloans,causinglenderstomakea
disproportionateamountofloanstogoodcreditrisks.
B）lendersmayrefuseloanstoindividualswithhighnetworth,becauseoftheir
greaterproclivityto“skiptown.”
C）lendersarereluctanttomakeloansthatarenotsecuredbycollateral.
D）alloftheabove.
Answer:
C
22）Theproblemofadverseselectionhelpstoexplain
A）whybanksprefertomakeloanssecuredbycollateral.
B）whybankshaveacomparativeadvantageinraisingfundsforAmerican
businesses.
C）whyborrowersarewillingtooffercollateraltosecuretheirpromisestorepay
loans.
D）alloftheabove.
E）only（A）and（B）oftheabove.
Answer:
D
23）Theproblemofadverseselectionhelpstoexplain
A）whichfirmsaremorelikelytoobtainfundsfrombanksandotherfinancial
intermediaries,ratherthanfromsecuritiesmarkets.
B）whycollateralisanimportantfeatureofconsumer,butnotbusiness,debt
contracts.
C）whydirectfinanceismoreimportantthanindirectfinanceasasourceof
businessfinance.
D）only（A）and（B）oftheabove.
Answer:
A
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24）Theconceptofadverseselectionhelpstoexplain
A）whycollateralisnotacommonfeatureofmanydebtcontracts.
B）whylarge,well-establishedcorporationsfinditsodifficulttoborrowfundsin
securitiesmarkets.
C）whyfinancialmarketsareamongthemostheavilyregulatedsectorsofthe
economy.
D）alloftheabove.
Answer:
C
25）Thatmostusedcarsaresoldbyintermediaries（i.e.,usedcardealers）provides
evidencethattheseintermediaries
A）havebeenaffordedspecialgovernmenttreatment,sinceusedcardealersdonot
provideinformationthatisvaluedbyconsumersofusedcars.
B）areabletopreventpotentialcompetitorsfromfree-ridingofftheinformation
thattheyprovide.
C）havefailedtosolveadverseselectionproblemsinthismarketbecause
“lemons”continuetobetraded.
D）doalloftheabove.
Answer:
B
26）Thatmostusedcarsaresoldbyintermediaries（i.e.,usedcardealers）provides
evidencethattheseintermediaries
A）provideinformationthatisvaluedbyconsumersofusedcars.
B）areabletopreventothersfromfree-ridingofftheinformationthatthey
provide.
C）canprofitbybecomingexpertsindeterminingwhetheranautomobileisa
goodcaroralemon.
D）doalloftheabove.
Answer:
D
27）Akeyfindingoftheeconomicanalysisoffinancialstructureisthat
A）theexistenceofthefree-riderproblemfortradedsecuritieshelpstoexpla
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