Question

1) To reduce information asymmetries in financial market, we can use:

A)boards of directors.

B)bond-rating agencies.

C)investment banks.

D)All of the answers are correct.

2) Consequences of the adverse selection problem in securities markets include:

A)an increase in the quality of securities issued.

B)a decrease in the overall number of good-quality securities issued.

C)an increase in the average price of securities issued.

D)an increase in the volume of securities traded.

3)According to the adverse selection problem in securities markets, as good-quality securities are retrieved from the market, the price of the remaining securities _____ and buyers realize that the probability of buying a low-quality security _____.

A)decreases; decreases

B)decreases; increases

C)increases; increases

D)increases; decreases

4) According to empirical research, in countries where stockholders' rights are strong, firms issue ____ stock than in countries where stockholders' rights are weak. Researchers conclude that strong stockholders' rights ____ moral hazard in stock markets.

A)more; increase

B)less; reduce

C)more; reduce

D)less; increase

5) The moral hazard problem in stock markets, in which ______ fear that managers will misuse their funds, makes it _____ for firms to raise funds by selling stocks.

A)principals; easier

B)principals; harder

C)agents; harder

D)agents; easier

6) Placing officers of a ________ firm on the board of directors of a new firm can reduce the problem of ________.

A)takeover; adverse selection

B)venture capital; moral hazard

C)banking; free riding

D)security exchange; adverse selection

7) Banks' methods to reduce asymmetric information problems include:

A)information gathering.

B)including restrictive covenants in loan contracts.

C)requiring collateral before making a loan.

D)All of the methods are used.

8) The largest commercial banks are called:

A)investment banks.

B)money-center banks.

C)federal reserve banks.

D)international banks.

9) The reason for bank consolidation is:

A)economies of scale.

B)empire building.

C)diversification.

D)All of the answers are correct.

10) When banks made loans, they traditionally ____; in recent years, they have ________ the loans.

A)sold the loan to another financial institution; deposited

B)kept the loan on their own books; securitized

C)lent money at very low rates; set high-interest rates on

D)took deposits; originated

11) The U.S. government encourages home ownership by:

A)guaranteeing mortgages for veterans and small businesses.

B)providing tax breaks.

C)supporting Fannie Mae and Freddie Mac.

D)All of the answers are correct.

12) The creation of the financial holding company Citigroup was made possible by the passage of the:

A)Glass-Steagall Act.

B)Gramm-Leach-Bliley Act.

C)Sarbanes-Oxley Act.

D)Sherman Antitrust Act

13) The Riegle-Neal Act prohibits banks from having more than ________ percent of all commercial bank deposits.

A)5

B)1

C)10

D)7.5

Answer 1

1) To reduce information asymmetries in financial market, we can use:

  D)All of the answers are correct.

Information assymetry occurs when one out of two parties involved in a financial transaction, has more information than the other and uses the information to make a more informed decision. It can lead to Moral Hazards and Adverse Selection.

It can be minimised by either having a corporate model of governance via more informed persons on the Board of Directors. It is also a system of establishing trust between the investors and the company which raises investor confidence in the market. And secondly, if there is a body that assigns credit ratings according to a company's performance in the market, investors can easily identify whether a bond carries high risk or low risk which solves the information assymetry. It can be done by Bond-Rating Agencies. And if there is an Investment Bank which is involved in advisroy based transactions on individuals, corporations and government, these help in raising the financial capital of the company which can also leads to more investor confidence.

2) Consequences of the adverse selection problem in securities markets include:

C)an increase in the average price of securities issued.

Adverse selection is a by-product of Information Assymetry where sellers have more information than the buyers. In the securities market scenario, the company issues more shares when it is over-valued and it leads to buyers paying more price for the securities.

3)According to the adverse selection problem in securities markets, as good-quality securities are retrieved from the market, the price of the remaining securities _____ and buyers realize that the probability of buying a low-quality security _____.

B)decreases; increases

In adverse selection scenario, the over-valued securities are present in the market and when there are hidden features in the available securities on offer, th prices of securities will decrease which enables the buyer to stock more low quality securities.

4) According to empirical research, in countries where stockholders' rights are strong, firms issue ____ stock than in countries where stockholders' rights are weak. Researchers conclude that strong stockholders' rights ____ moral hazard in stock markets.

C)more; reduce

In countries with strong stockholder rights, more international capitals will be attracted an this leads to more domestic investment and the firms will be issuing more stocks which reduces moral hazard in stock markets.

5) The moral hazard problem in stock markets, in which ______ fear that managers will misuse their funds, makes it _____ for firms to raise funds by selling stocks.

B)principals; harder

The moral hazard problem occurs when the managers invest on the behalf of principals and the principals fear that since the managers have more information and are incentivised, they will take more risk which in turn makes it harder for the firms to raise funds by selling stocks.

6) Placing officers of a ________ firm on the board of directors of a new firm can reduce the problem of ________.

D)security exchange; adverse selection

Because a security exchange officer can know the risks that are associated with the market and based on his experiences, can guide the board on matters of reducing adverse selection.

7) Banks' methods to reduce asymmetric information problems include:

D)All of the methods are used.

Because when the borrowers from the bank has more information than the bank itself, the bank can't know whether the borrower will default or not. Inthat case, all of the above methods are used to reduce that.

8) The largest commercial banks are called:

C)federal reserve banks.

Commercial banks can be National Banks which forms a part of Federal Reserve Banks. Hence the largest commercial banks are called Federal Reserve Banks.

9) The reason for bank consolidation is:

D)All of the answers are correct.

All the factors such as diversification, to build a global banking emoire competant to leading banks and economies of sale, etc. affects banking consolidation.

10) When banks made loans, they traditionally ____; in recent years, they have ________ the loans.

C)lent money at very low rates; set high-interest rates on

Since bank loans were a new commodity in the beginning, to attratc more takers for loasn, banks were offering loans a tcheaper rates then and now, due to teh demand rise in the sector for loans, they have increased the interest rates.

11) The U.S. government encourages home ownership by:

D)All of the answers are correct.

The US government's logic is that by encouraging people for home ownership, it halps them to accumulate wealth and it enables them to save and inves more money which would become beneficial to the economy.

12) The creation of the financial holding company Citigroup was made possible by the passage of the:

B)Gramm-Leach-Bliley Act.

It is also known as Financial Services Modernization Act, 1999. Bank consolidation was the purpose of this Act along with other measures to strengthen the economy.

13) The Riegle-Neal Act prohibits banks from having more than ________ percent of all commercial bank deposits.

C)10

It was passed in 1994 which aimed at unifrom banking and inter-state acquisition of banking entities.