米什金货币金融学英文版习题答案chapter8英文习题

米什金货币金融学英文版习题答案chapter8英文习题EconomicsofMoney,Banking,andFinancialMarkets,11e,GlobalEdition(Mishkin)Chapter8AnEconomicAnalysisofFinancialStructure8.1BasicFactsAboutFinancialStructureThroughouttheWorld1)AmericanbusinessesgettheirexternalfundsprimarilyfromA)bankloans.B)bondsandcommercialpaperissues.C)stockissues.D)loansfromnonbankfinancialintermediaries.Answer:DAACSB:AnalyticalThinking2)OfthesourcesofexternalfundsfornonfinancialbusinessesintheUnitedStates,loansfrombanksandotherfinancialintermediariesaccountforapproximately________ofthetotal.A)6%B)40%C)56%D)60%Answer:CAACSB:AnalyticalThinking3)OfthesourcesofexternalfundsfornonfinancialbusinessesintheUnitedStates,corporatebondsandcommercialpaperaccountforapproximately________ofthetotal.A)5%B)10%C)32%D)50%Answer:CAACSB:AnalyticalThinking4)OfthefollowingsourcesofexternalfinanceforAmericannonfinancialbusinesses,theleastimportantisA)loansfrombanks.B)stocks.C)bondsandcommercialpaper.D)loansfromotherfinancialintermediaries.Answer:BAACSB:AnalyticalThinking5)OfthesourcesofexternalfundsfornonfinancialbusinessesintheUnitedStates,stocksaccountforapproximately________ofthetotal.A)2%B)11%C)20%D)40%Answer:BAACSB:AnalyticalThinking6)Ofthefoursourcesofexternalfundingfornonfinancialbusinesses,theleastoftenusedintheU.S.isA)bankloans.B)nonbankloans.C)bonds.D)stock.Answer:DAACSB:AnalyticalThinking7)WhichofthefollowingstatementsconcerningexternalsourcesoffinancingfornonfinancialbusinessesintheUnitedStatesareTRUE?A)Stocksareafarmoreimportantsourceoffinancethanarebonds.B)Stocksandbonds,combined,supplylessthanone-halfoftheexternalfunds.C)Financialintermediariesaretheleastimportantsourceofexternalfundsforbusinesses.D)Since1970,morethanhalfofthenewissuesofstockhavebeensoldtoAmericanhouseholds.Answer:BAACSB:ReflectiveThinking8)WhichofthefollowingstatementsconcerningexternalsourcesoffinancingfornonfinancialbusinessesintheUnitedStatesareTRUE?A)Issuingmarketablesecuritiesistheprimarywaythattheyfinancetheiractivities.B)Bondsaretheleastimportantsourceofexternalfundstofinancetheiractivities.C)Stocksarearelativelyunimportantsourceoffinancefortheiractivities.D)SellingbondsdirectlytotheAmericanhouseholdisamajorsourceoffundingforAmericanbusinesses.Answer:CAACSB:ReflectiveThinking9)WithregardtoexternalsourcesoffinancingfornonfinancialbusinessesintheUnitedStates,whichofthefollowingareaccuratestatements?A)MarketablesecuritiesaccountforalargershareofexternalbusinessfinancingintheUnitedStatesthaninGermanyandJapan.B)Since1970,mostofthenewlyissuedcorporatebondsandcommercialpaperhavebeensolddirectlytoAmericanhouseholds.C)Directfinanceaccountsformorethan50percentoftheexternalfinancingofAmericanbusinesses.D)Smallerbusinessesalmostalwaysraisefundsbyissuingmarketablesecurities.Answer:AAACSB:ReflectiveThinking10)NonfinancialbusinessesinGermany,Japan,andCanadaraisemostoftheirfundsA)byissuingstock.B)byissuingbonds.C)fromnonbankloans.D)frombankloans.Answer:DAACSB:ApplicationofKnowledge11)Asasourceoffundsfornonfinancialbusinesses,stocksarerelativelymoreimportantinA)theUnitedStates.B)Germany.C)Japan.D)Canada.Answer:DAACSB:ApplicationofKnowledge12)Directfinanceinvolvesthesaleto________ofmarketablesecuritiessuchasstocksandbonds.A)householdsB)insurancecompaniesC)pensionfundsD)financialintermediariesAnswer:AAACSB:ApplicationofKnowledge13)RegulationofthefinancialsystemA)occursonlyintheUnitedStates.B)protectsthejobsofemployeesoffinancialinstitutions.C)protectsthewealthofownersoffinancialinstitutions.D)ensuresthestabilityofthefinancialsystem.Answer:DAACSB:ReflectiveThinking14)OnepurposeofregulationoffinancialmarketsistoA)limittheprofitsoffinancialinstitutions.B)increasecompetitionamongfinancialinstitutions.C)promotetheprovisionofinformationtoshareholders,depositorsandthepublic.D)guaranteethatthemaximumratesofinterestarepaidondeposits.Answer:CAACSB:ReflectiveThinking15)PropertythatispledgedtothelenderintheeventthataborrowercannotmakehisorherdebtpaymentiscalledA)collateral.B)points.C)interest.D)goodfaithmoney.Answer:AAACSB:ApplicationofKnowledge16)CollateralizeddebtisalsoknowasA)unsecureddebt.B)secureddebt.C)unrestricteddebt.D)promissorydebt.Answer:BAACSB:ApplicationofKnowledge17)CreditcarddebtisA)secureddebt.B)unsecureddebt.C)restricteddebt.D)unrestricteddebt.Answer:BAACSB:ApplicationofKnowledge18)ThepredominantformofhouseholddebtisA)consumerinstallmentdebt.B)collateralizeddebt.C)unsecureddebt.D)unrestricteddebt.Answer:BAACSB:AnalyticalThinking19)Ifyoudefaultonyourautoloan,yourcarwillberepossessedbecauseithasbeenpledgedas________fortheloan.A)interestB)collateralC)dividendD)commodityAnswer:BAACSB:AnalyticalThinking20)Commercialandfarmmortgages,inwhichpropertyispledgedascollateral,accountforA)one-quarterofborrowingbynonfinancialbusinesses.B)one-halfofborrowingbynonfinancialbusinesses.C)one-twentiethofborrowingbynonfinancialbusinesses.D)two-thirdsofborrowingbynonfinancialbusinesses.Answer:AAACSB:ApplicationofKnowledge21)A________isaprovisionthatrestrictsorspecifiescertainactivitiesthataborrowercanengagein.A)residualclaimantB)riskhedgeC)restrictivebarrierD)restrictivecovenantAnswer:DAACSB:ApplicationofKnowledge22)Aclauseinamortgageloancontractrequiringtheborrowertopurchasehomeowner'sinsuranceisanexampleofaA)proscriptivecovenant.B)prescriptivecovenant.C)restrictivecovenant.D)constraint-imposedcovenant.Answer:CAACSB:ApplicationofKnowledge23)WhichofthefollowingisNOToneoftheeightbasicpuzzlesaboutfinancialstructure?A)StocksarethemostimportantsourceoffinanceforAmericanbusinesses.B)Issuingmarketablesecuritiesisnottheprimarywaybusinessesfinancetheiroperations.C)Indirectfinance,whichinvolvestheactivitiesoffinancialintermediaries,ismanytimesmoreimportantthandirectfinance,inwhichbusinessesraisefundsdirectlyfromlendersinfinancialmarkets.D)Banksarethemostimportantsourceofexternalfundstofinancebusinesses.Answer:AAACSB:ReflectiveThinking24)WhichofthefollowingisNOToneoftheeightbasicpuzzlesaboutfinancialstructure?A)Debtcontractsaretypicallyextremelycomplicatedlegaldocumentsthatplacesubstantialrestrictionsonthebehavioroftheborrower.B)Indirectfinance,whichinvolvestheactivitiesoffinancialintermediaries,ismanytimesmoreimportantthandirectfinance,inwhichbusinessesraisefundsdirectlyfromlendersinfinancialmarkets.C)Collateralisaprevalentfeatureofdebtcontractsforbothhouseholdsandbusiness.D)Thereisverylittleregulationofthefinancialsystem.Answer:DAACSB:ReflectiveThinking8.2TransactionCosts1)ThecurrentstructureoffinancialmarketscanbebestunderstoodastheresultofattemptsbyfinancialmarketparticipantstoA)adapttocontinuallychanginggovernmentregulations.B)dealwiththegreatnumberofsmallfirmsintheUnitedStates.C)reducetransactioncosts.D)cartelizetheprovisionoffinancialservices.Answer:CAACSB:ReflectiveThinking2)ThereductionintransactionscostsperdollarofinvestmentasthesizeoftransactionsincreasesisA)discounting.B)economiesofscale.C)economiesoftrade.D)diversification.Answer:BAACSB:ApplicationofKnowledge3)BybundlingsharepurchasesofmanyinvestorstogethermutualfundscantakeadvantageofeconomiesofscaleandtherebylowerA)adverseselection.B)moralhazard.C)transactionscosts.D)diversification.Answer:CAACSB:AnalyticalThinking4)WhichofthefollowingisNOTabenefittoanindividualpurchasingamutualfund?A)reducedriskB)lowertransactionscostsC)free-ridingD)diversificationAnswer:CAACSB:AnalyticalThinking5)Financialintermediariesdevelop________inthingssuchascomputertechnologywhichallowsthemtolowertransactionscosts.A)expertiseB)diversificationC)regulationsD)equityAnswer:AAACSB:InformationTechnology6)Financialintermediaries'lowtransactioncostsallowthemtoprovide________servicesthatmakeiteasierforcustomerstoconducttransactions.A)liquidityB)conductionC)transcendentalD)equitableAnswer:AAACSB:ReflectiveThinking7)Howdoesamutualfundlowertransactionscoststhrougheconomiesofscale?Answer:Themutualfundtakesthefundsoftheindividualswhohavepurchasedsharesandusesthemtopurchasebondsorstocks.Becausethemutualfundwillbepurchasinglargeblocksofstocksorbondstheywillbeabletoobtainthematlowertransactionscoststhantheindividualpurchasesofsmalleramountscould.AACSB:ReflectiveThinking8.3AsymmetricInformation:AdverseSelectionandMoralHazard1)Aborrowerwhotakesoutaloanusuallyhasbetterinformationaboutthepotentialreturnsandriskoftheinvestmentprojectsheplanstoundertakethandoesthelender.ThisinequalityofinformationiscalledA)moralhazard.B)asymmetricinformation.C)noncollateralizedrisk.D)adverseselection.Answer:BAACSB:ReflectiveThinking2)Thepresenceof________infinancialmarketsleadstoadverseselectionandmoralhazardproblemsthatinterferewiththeefficientfunctioningoffinancialmarkets.A)noncollateralizedriskB)free-ridingC)asymmetricinformationD)costlystateverificationAnswer:CAACSB:AnalyticalThinking3)Theproblemcreatedbyasymmetricinformationbeforethetransactionoccursiscalled________,whiletheproblemcreatedafterthetransactionoccursiscalled________.A)adverseselection;moralhazardB)moralhazard;adverseselectionC)costlystateverification;free-ridingD)free-riding;costlystateverificationAnswer:AAACSB:ApplicationofKnowledge4)IfbadcreditrisksaretheoneswhomostactivelyseekloansthenfinancialintermediariesfacetheproblemofA)moralhazard.B)adverseselection.C)free-riding.D)costlystateverification.Answer:BAACSB:ReflectiveThinking5)TheproblemfacedbythelenderthattheborrowermaytakeonadditionalriskafterreceivingtheloaniscalledA)adverseselection.B)moralhazard.C)transactionscosts.D)diversification.Answer:BAACSB:AnalyticalThinking6)Anexampleofthe________problemwouldbeifBrianborrowedmoneyfromSeaninordertopurchaseausedcarandinsteadtookatriptoAtlanticCityusingthosefunds.A)moralhazardB)adverseselectionC)costlystateverificationD)agencyAnswer:AAACSB:Ethicalunderstandingandreasoningabilities7)Theanalysisofhowasymmetricinformationproblemsaffecteconomicbehavioriscalled________theory.A)unevenB)parallelC)principalD)agencyAnswer:DAACSB:ApplicationofKnowledge8.4TheLemonsProblem:HowAdverseSelectionInfluencesFinancialStructure1)The"lemonsproblem"existsbecauseofA)transactionscosts.B)economiesofscale.C)rationalexpectations.D)asymmetricinformation.Answer:DAACSB:ApplicationofKnowledge2)Becauseofthe"lemonsproblem"thepriceabuyerofausedcarpaysisA)equaltothepriceofalemon.B)lessthanthepriceofalemon.C)equaltothepriceofapeach.D)betweenthepriceofalemonandapeach.Answer:DAACSB:AnalyticalThinking3)AdverseselectionisaproblemassociatedwithequityanddebtcontractsarisingfromA)thelender'srelativelackofinformationabouttheborrower'spotentialreturnsandrisksofhisinvestmentactivities.B)thelender'sinabilitytolegallyrequiresufficientcollateraltocovera100%lossiftheborrowerdefaults.C)theborrower'slackofincentivetoseekaloanforhighlyriskyinvestments.D)thelender'sinabilitytorestricttheborrowerfromchanginghisbehavioroncegivenaloan.Answer:AAACSB:ReflectiveThinking4)The________problemhelpstoexplainwhytheprivateproductionandsaleofinformationcannoteliminate________.A)free-rider;adverseselectionB)free-rider;moralhazardC)principal-agent;adverseselectionD)principal-agent;moralhazardAnswer:AAACSB:ReflectiveThinking5)Thefree-riderproblemoccursbecauseA)peoplewhopayforinformationuseitfreely.B)peoplewhodonotpayforinformationuseit.C)informationcanneverbesoldatanyprice.D)itisneverprofitabletoproduceinformation.Answer:BAACSB:ReflectiveThinking6)IntheUnitedStates,thegovernmentagencyrequiringthatfirmsthatsellsecuritiesinpublicmarketsadheretostandardaccountingprinciplesanddiscloseinformationabouttheirsales,assets,andearningsistheA)FederalCommunicationsCommission.B)FederalTradeCommission.C)SecuritiesandExchangeCommission.D)FederalReserveSystem.Answer:CAACSB:AnalyticalThinking7)Governmentregulationsrequirepubliclytradedfirmstoprovideinformation,reducingA)transactionscosts.B)theneedfordiversification.C)theadverseselectionproblem.D)economiesofscale.Answer:CAACSB:AnalyticalThinking8)AlessonoftheEnroncollapseisthatgovernmentregulationA)alwaysfails.B)canreducebutnoteliminateasymmetricinformation.C)increasestheproblemofasymmetricinformation.D)shouldbereduced.Answer:BAACSB:ReflectiveThinking9)Thatmostusedcarsaresoldbyintermediaries(i.e.,usedcardealers)providesevidencethattheseintermediariesA)havebeenaffordedspecialgovernmenttreatment,sinceusedcardealersdonotprovideinformationthatisvaluedbyconsumersofusedcars.B)areabletopreventpotentialcompetitorsfromfree-ridingofftheinformationthattheyprovide.C)havefailedtosolveadverseselectionproblemsinthismarketbecause"lemons"continuetobetraded.D)havesolvedthemoralhazardproblembyprovidingvaluableinformationtotheircustomers.Answer:BAACSB:ReflectiveThinking10)Analysisofadverseselectionindicatesthatfinancialintermediaries,especiallybanksA)haveadvantagesinovercomingthefree-riderproblem,helpingtoexplainwhyindirectfinanceisamoreimportantsourceofbusinessfinancethanisdirectfinance.B)despitetheirsuccessinovercomingfree-riderproblems,neverthelessplayaminorroleinmovingfundstocorporations.C)providebetter-knownandlargercorporationsahigherpercentageoftheirexternalfundsthantheydotonewerandsmallercorporationswhichrelytoagreaterextentonthenewissuesmarketforfunds.D)mustbuysecuritiesfromcorporationstodiversifytheriskthatresultsfromholdingnon-tradableloans.Answer:AAACSB:ReflectiveThinking11)TheconceptofadverseselectionhelpstoexplainallofthefollowingEXCEPTA)whyfirmsaremorelikelytoobtainfundsfrombanksandotherfinancialintermediaries,ratherthanfromthesecuritiesmarkets.B)whyindirectfinanceismoreimportantthandirectfinanceasasourceofbusinessfinance.C)whydirectfinanceismoreimportantthanindirectfinanceasasourceofbusinessfinance.D)whythefinancialsystemissoheavilyregulated.Answer:CAACSB:ReflectiveThinking12)Asinformationtechnologyimproves,thelendingroleoffinancialinstitutionssuchasbanksshouldA)increasesomewhat.B)decrease.C)staythesame.D)increasesignificantly.Answer:BAACSB:InformationTechnology13)Externalfinancingby________shouldbemoreimportantindevelopingcountriesthaninindustrializedcountriesbecauseinformationaboutprivatefirmsismoredifficulttocollectindevelopingcountries.A)financialintermediariesB)bondsC)stockD)directlendingAnswer:AAACSB:ReflectiveThinking14)Thatonlylarge,well-establishedcorporationshaveaccesstosecuritiesmarketsA)explainswhyindirectfinanceissuchanimportantsourceofexternalfundsforbusinesses.B)canbeexplainedbytheproblemofmoralhazard.C)canbeexplainedbygovernmentregulationsthatprohibitsmallfirmsfromacquiringfundsinsecuritiesmarkets.D)explainswhynewerandsmallercorporationsrelysoheavilyonthenewissuesmarketforfunds.Answer:AAACSB:ReflectiveThinking15)BecauseoftheadverseselectionproblemA)goodcreditrisksaremorelikelytoseekloanscausinglenderstomakeadisproportionateamountofloanstogoodcreditrisks.B)lendersmayrefuseloanstoindividualswithhighnetworth,becauseoftheirgreaterproclivityto"skiptown."C)lendersarereluctanttomakeloansthatarenotsecuredbycollateral.D)lenderswillwritedebtcontractsthatrestrictcertainactivitiesofborrowers.Answer:CAACSB:ReflectiveThinking16)NetworthcanperformasimilarroletoA)diversification.B)collateral.C)intermediation.D)economiesofscale.Answer:BAACSB:AnalyticalThinking17)TheproblemofadverseselectionhelpstoexplainA)whyfirmsaremorelikelytoobtainfundsfrombanksandotherfinancialintermediaries,ratherthanfromsecuritiesmarkets.B)whycollateralisanimportantfeatureofconsumer,butnotbusiness,debtcontracts.C)whydirectfinanceismoreimportantthanindirectfinanceasasourceofbusinessfinance.D)whylendersrefuseloanstoindividualswithhighnetworth.Answer:AAACSB:ReflectiveThinking18)TheconceptofadverseselectionhelpstoexplainA)whycollateralisnotacommonfeatureofmanydebtcontracts.B)whylarge,well-establishedcorporationsfinditsodifficulttoborrowfundsinsecuritiesmarkets.C)whyfinancialmarketsareamongthemostheavilyregulatedsectorsoftheeconomy.D)whystocksarethemostimportantsourceofexternalfinancingforbusinesses.Answer:CAACSB:ReflectiveThinking19)ToolstohelpsolvetheadverseselectionprobleminfinancialmarketsincludeallofthefollowingEXCEPTA)diversification.B)governmentregulationstoincreaseinformation.C)theuseoffinancialintermediaries.D)theprivateproductionandsaleofinformation.Answer:AAACSB:ApplicationofKnowledge20)Howdoescollateralhelptoreducetheadverseselectionproblemincreditmarket?Answer:Collateralispropertythatispromisedtothelenderiftheborrowerdefaultsthusreducingthelender'slosses.Lendersaremorewillingtomakeloanswhenthereiscollateralthatcanbesoldiftheborrowerdefaults.AACSB:ReflectiveThinking8.5HowMoralHazardAffectstheChoiceBetweenDebtandEquityContracts1)EquitycontractsA)areclaimstoashareintheprofitsandassetsofabusiness.B)havetheadvantageoverdebtcontractsofalowercostlystateverification.C)areusedmuchmorefrequentlytoraisecapitalthanaredebtcontracts.D)arenotsubjecttothemoralhazardproblem.Answer:AAACSB:ApplicationofKnowledge2)Aproblemforequitycontractsisaparticulartypeof________calledthe________problem.A)adverseselection;principal-agentB)moralhazard;principal-agentC)adverseselection;free-riderD)moralhazard;free-riderAnswer:BAACSB:ReflectiveThinking3)Moralhazardinequitycontractsisknownasthe________problembecausethemanagerofthefirmhasfewerincentivestomaximizeprofitsthanthestockholdersmightideallyprefer.A)principal-agentB)adverseselectionC)free-riderD)debtdeflationAnswer:AAACSB:ReflectiveThinking4)Managers(________)mayactintheirowninterestratherthanintheinterestofthestockholder-owners(________)becausethemanagershavelessincentivetomaximizeprofitsthanthestockholder-ownersdo.A)principals;agentsB)principals;principalsC)agents;agentsD)agents;principalsAnswer:DAACSB:Ethicalunderstandingandreasoningabilities5)Theprincipal-agentproblemA)occurswhenmanagershavemoreincentivetomaximizeprofitsthanthestockholders-ownersdo.B)infinancialmarketshelpstoexplainwhyequityisarelativelyimportantsourceoffinanceforAmericanbusiness.C)wouldnotariseiftheownersofthefirmhadcompleteinformationabouttheactivitiesofthemanagers.D)explainswhydirectfinanceismoreimportantthanindirectfinanceasasourceofbusinessfinance.Answer:CAACSB:ReflectiveThinking6)Theprincipal-agentproblemwouldnotoccurif________ofafirmhadcompleteinformationaboutactionsofthe________.A)owners;customersB)owners;managersC)managers;customersD)managers;ownersAnswer:BAACSB:ReflectiveThinking7)TherecentEnronandTycoscandalsareanexampleofA)thefree-riderproblem.B)theadverseselectionproblem.C)theprincipal-agentproblem.D)the"lemonsproblem."Answer:CAACSB:Ethicalunderstandingandreasoningabilities8)Thenameeconomistsgivetheprocessbywhichstockholdersgatherinformationbyfrequentmonitoringofthefirm'sactivitiesisA)costlystateverification.B)thefree-riderproblem.C)costlyavoidance.D)debtintermediation.Answer:AAACSB:ApplicationofKnowledge9)BecauseinformationisscarceA)helpsexplainwhyequitycontractsareusedsomuchmorefrequentlytoraisecapitalthanaredebtcontracts.B)monitoringmanagersgivesrisetocostlystateverification.C)governmentregulations,suchasstandardaccountingprinciples,havenoimpactonproblemssuchasmoralhazard.D)developingnationsdonotrelyheavilyonbanksforbusinessfinancing.Answer:BAACSB:ReflectiveThinking10)GovernmentregulationsdesignedtoreducethemoralhazardproblemincludeA)lawsthatforcefirmstoadheretostandardaccountingprinciples.B)lightsentencesforthosewhocommitthefraudofhidingandstealingprofits.C)stateverificationsubsidies.D)statelicensingrestrictions.Answer:AAACSB:ReflectiveThinking11)Onefinancialintermediaryinourfinancialstructurethathelpstoreducethemoralhazardfromarisingfromtheprincipal-agentproblemistheA)venturecapitalfirm.B)moneymarketmutualfund.C)pawnbroker.D)savingsandloanassociation.Answer:AAACSB:ApplicationofKnowledge12)Aventurecapitalfirmprotectsitsequityinvestmentfrommoralhazardthroughwhichofthefollowingmeans?A)Itplacespeopleontheboardofdirectorstobettermonitortheborrowingfirm'sactivities.B)Itwritescontractsthatprohibitthesaleofanequityinvestmenttotheventurecapitalfirm.C)Itprohibitstheborrowingfirmfromreplacingitsmanagement.D)Itrequiresa50%stakeinthecompany.Answer:AAACSB:ReflectiveThinking13)Onewaytheventurecapitalfirmavoidsthefree-riderproblemisbyA)prohibitingthesaleofequityinthefirmtoanyoneexcepttheventurecapitalfirm.B)prohibitingmembersfromservingontheboardofdirectors.C)prohibitingtheborrowingfirmfromreplacingmanagement.D)requiringcollateralequaltothevalueoftheborrowedfunds.Answer:AAACSB:ReflectiveThinking14)EquitycontractsaccountforasmallfractionofexternalfundsraisedbyAmericanbusinessesbecauseA)costlystateverificationmakestheequitycontractlessdesirablethanthedebtcontract.B)ofthereducedscopeformoralhazardproblemsunderequitycontracts,ascomparedtodebtcontracts.C)equitycontractsdonotpermitborrowingfirmstoraiseadditionalfundsbyissuingdebt.D)thereisnomoralhazardproblemwhenusingadebtcontract.Answer:AAACSB:ReflectiveThinking15)DebtcontractsA)areagreementsbytheborrowerstopaythelendersfixeddollaramountsatperiodicintervals.B)haveahighercostofstateverificationthanequitycontracts.C)areusedlessfrequentlytoraisecapitalthanareequitycontracts.D)neverresultinalossforthelender.Answer:AAACSB:ApplicationofKnowledge16)Sincetheyrequirelessmonitoringoffirms,________contractsareusedmorefrequentlythan________contractstoraisecapital.A)debt;equityB)equity;debtC)debt;loanD)equity;stockAnswer:AAACSB:ReflectiveThinking17)SolutionstothemoralhazardinequitycontractsincludeallofthefollowingEXCEPTA)governmentregulationstoincreaseinformation.B)theuseoffinancialintermediaries.C)theuseofdebtcontracts.D)governmentownershipofresources.Answer:DAACSB:ApplicationofKnowledge18)Explaintheprincipal-agentproblemasitpertainstoequitycontracts.Answer:Theprincipalsarethestockholderswhoownmostoftheequity.Theagentsarethemanagersofthefirmwhogenerallyownonlyasmallportionofthefirm.Theproblemoccursbecausetheagentsmaynothaveasmuchincentivetoprofitmaximizeasthestockholders.AACSB:ReflectiveThinking8.6HowMoralHazardInfluencesFinancialStructureinDebtMarkets1)Althoughdebtcontractsrequirelessmonitoringthanequitycontracts,debtcontractsarestillsubjectto________sinceborrowershaveanincentivetotakeonmoreriskthanthelenderwouldlike.A)moralhazardB)agencytheoryC)diversificationD)the"lemons"problemAnswer:AAACSB:ReflectiveThinking2)AdebtcontractisincentivecompatibleA)iftheborrowerhastheincentivetobehaveinthewaythatthelenderexpectsanddesires,sincedoingotherwisejeopardizestheborrower'snetworthinthebusiness.B)iftheborrower'snetworthissufficientlylowsothatthelender'sriskofmoralhazardissignificantlyreduced.C)ifthedebtcontractistreatedlikeanequity.D)ifthelenderhastheincentivetobehaveinthewaythattheborrowerexpectsanddesires.Answer:AAACSB:ReflectiveThinking3)HighnetworthhelpstodiminishtheproblemofmoralhazardproblembyA)requiringthestatetoverifythedebtcontract.B)collateralizingthedebtcontract.C)makingthedebtcontractincentivecompatible.D)givingthedebtcontractcharacteristicsofequitycontracts.Answer:CAACSB:ReflectiveThinking4)OnewayofdescribingthesolutionthathighnetworthprovidestothemoralhazardproblemistosaythatitA)collateralizesthedebtcontract.B)makesthedebtcontractincentivecompatible.C)stateverifiesthedebtcontract.D)removesalloftheriskinthedebtcontract.Answer:BAACSB:ReflectiveThinking5)AclauseinadebtcontractrequiringthattheborrowerpurchaseinsuranceagainstlossoftheassetfinancedwiththeloaniscalledaA)collateral-insuranceclause.B)prescriptioncovenant.C)restrictivecovenant.D)proscriptioncovenant.Answer:CAACSB:ApplicationofKnowledge6)Professionalathletesoftenhavecontractcl