Answer: B

22) Which of the following markets is sometimes organized as an over-the-counter market A) The stock market B) The bond market

C) The foreign exchange market D) The federal funds market E) all of the above Answer: E

23) Bonds that are sold in a foreign country and are denominated in that country's currency are known as

A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: A

24) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A) foreign bonds. B) Eurobonds. C) Eurocurrencies. D) Eurodollars. Answer: B

25) Financial intermediaries

A) exist because there are substantial information and transaction costs in the economy. B) improve the lot of the small saver.

C) are involved in the process of indirect finance. D) do all of the above.

E) do only A and B of the above. Answer: D

26) The main sources of financing for businesses, in order of importance, are A) financial intermediaries, issuing bonds, issuing stocks. B) issuing bonds, issuing stocks, financial intermediaries. C) issuing stocks, issuing bonds, financial intermediaries. D) issuing stocks, financial intermediaries, issuing bonds. Answer: A

27) The presence of transaction costs in financial markets explains, in part, why

A) financial intermediaries and indirect finance play such an important role in financial markets.

B) equity and bond financing play such an important role in financial markets.

C) corporations get more funds through equity financing than they get from financial intermediaries. D) direct financing is more important than indirect financing as a source of funds. Answer: A

28) Financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of A) poorly informed consumers. B) standardization. C) economies of scale. D) their market power. Answer: C

29) The purpose of diversification is to

A) reduce the volatility of a portfolio's return. B) raise the volatility of a portfolio's return. C) reduce the average return on a portfolio. D) raise the average return on a portfolio. Answer: A

30) An investor who puts all her funds into one asset ________ her portfolio's ________. A) increases; diversification B) decreases; diversification C) increases; average return D) decreases; average return Answer: B

31) Through risk-sharing activities, a financial intermediary ________ its own risk and ________ the risks of its customers. A) reduces; increases B) increases; reduces C) reduces; reduces D) increases; increases Answer: B

32) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) noncollateralized risk B) free-riding

C) asymmetric information D) costly state verification Answer: C

33) When the lender and the borrower have different amounts of information regarding a transaction, ________ is said to exist. A) asymmetric information B) adverse selection C) moral hazard D) fraud Answer: A

34) 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

35) 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

36) 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. E) only A and C of the above. Answer: D

37) 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

38) 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.

E) principal-agent problem. Answer: B

39) 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

40) 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) caveat venditor. Answer: B

41) 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

E) Only A and C of the above Answer: D

42) 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