TUTORIAL 6

ECONOMIC ANALYSIS OF FINANCIAL STRUCTURE

Part 1: Review questions

1. What are eight basic facts about the global financial system?
2. Explain the problems of transaction costs in the financial markets.
3. Describe why asymmetric information leads to adverse selection and moral
hazard.
4. Explain adverse selection and moral hazard problem in debt and equity contracts
and various tools used to reduce them.

Part 2: Multiple choice questions

1. The largest source of external funds for U.S. firms is:
A. loans.
B. bonds.
C. stocks
D. trade debts

2. Asymmetric information occurs when

A. one party in a transaction has more information than another.
B. one party in a transaction has more influence than another.
C. each party in a transaction gains from the transaction.
D. each party has equal information

3. A bad credit risk seeks out loans more actively. This is a(n):
A. adverse selection problem.
B. moral hazard problem.
C. principal-agent problem.
D. liquidity problem

4. A borrower engages in activities that are undesirable from a lender's point of

view. This is the:
A. moral hazard problem.
B. liquidity problem.
C. transaction costs problem.
D. adverse selection problem.

5. The free-rider problem

A. will only occur if information costs are zero.
B. is that people who do not pay for information take advantage of information other
people have paid for.
C. will make more people willing to provide information services.
D. makes it easier for an investor to continue to buy securities at less than the true
value.

6. The principal-agent problem

 A. occurs because owners have complete information about managers.
B. is a type of moral hazard.
C. eliminates costly state verification.
D. is not related to asymmetric information.

7. When interest rates are high, lenders may not want to make loans because of:
A. moral hazard.
B. the principal-agent problem.
C. adverse selection.
D. costly state verification.

8. A venture capital firm: vốn đầu tư mạo hiểm

A. increases the size of the moral hazard problem.
B. pools resources to help entrepreneurs start new firms.
C. allows equity shares of the new firm to be sold in the marketplace.
D. has no say in the management of the new firm.

9. Which of the following describes the "lemons problem?"

A. Sellers have more information than buyers and more transactions occur.
B. Buyers have more information than sellers and more transactions occur.
C. Sellers have more information than buyers and few transactions occur.
D. Buyers have more information than sellers and few transactions occur.
VD : mua bán ô tô
10. By taking advantage of economies of scale and developing expertise, financial
intermediaries overcome the problem of:
A. adverse selection.
B. free-riding.
C. high transaction costs.
D. moral hazard.

11. Regulation of the financial system

A. occurs only in the United States.
B. protects the jobs of employees of financial institutions.
C. protects the wealth of owners of financial institutions.
D. ensures the stability of the financial system.

12. One purpose of regulation of financial markets is to

A. limit the profits of financial institutions.
B. increase competition among financial institutions.
C. promote the provision of information to shareholders, depositors and the public.
D. guarantee that the maximum rates of interest are paid on deposits.
 13. Property that is pledged to the lender in the event that a borrower cannot make
his or her debt payment is called
A. collateral.
B. points.
C. interest.
D. good faith money.

14. The predominant form of household debt is hình thức nợ hộ gia đình chủ yếu là
A. consumer installment debt.
B. collateralized debt.
C. unsecured debt.
D. unrestricted debt.

15. Collateralized debt is also known as

A. unsecured debt.
B. unrestricted debt.
C. secured debt.
D. promissory debt.

16. Credit card debt is

A. secured debt.
B. restricted debt.
C. unrestricted debt.
D. unsecured debt.

17. If you default on your auto loan, your car will be repossessed because it has been
pledged as for the loan.
A. interest
B. collateral
C. dividend
D. commodity

18. A is a provision that restricts or specifies certain activities that a

borrower can engage in.
A. residual claimant
B. risk hedge
C. restrictive barrier
D. restrictive covenant

19. A clause in a mortgage loan contract requiring the borrower to purchase

homeowner's insurance is an example of a
A. proscriptive covenant.
B. prescriptive covenant.
C. restrictive covenant.
D. constraint-imposed covenant.

iao ước phủ định hay giao ước hạn chế (tiếng Anh: Negative Covenant/Restrictive
Covenant) là một giao ước trái phiếu ngăn chặn một số hoạt động của tổ chức phát hành trừ
khi được trái chủ đồng ý, nhằm bảo vệ lợi ích tốt nhất cho các trái chủ.
 20. That only large, well-established corporations have access to securities markets
A. explains why indirect finance is such an important source of external funds for
businesses.
B. can be explained by the problem of moral hazard.
C. can be explained by government regulations that prohibit small firms from acquiring
funds in securities markets.
D. explains why newer and smaller corporations rely so heavily on the new issues
market for funds.

21. The concept of adverse selection helps to explain

A. why collateral is not a common feature of many debt contracts.
B. why large, well-established corporations find it so difficult to borrow funds in
securities markets.
C. why financial markets are among the most heavily regulated sectors of the economy.
D. why stocks are the most important source of external financing for businesses.

22. As information technology improves, the lending role of financial institutions

such as banks should .
A. increase somewhat
B. decrease
C. stay the same
D. increase significantly

23. Net worth can perform a similar role to .

A. diversification
B. collateral
C. intermediation
D. economies of scale

Part 3: Group Discussion questions

1. How does a mutual fund lower transactions costs through economies of scale?

2. Explain the principal-agent problem as it pertains to equity contracts:

Part 4: End-of-chapter questions

2. What are the transaction costs problems facing financial organizations? Explain how
financial Intermediaries can help reduce these problems.
Because the mutual fund will be purchasing large blocks of stocks or bonds they willbe
able to obtain them at lower transactions costs than the individual purchases of smaller
amounts could.They buy large blocks of stocks => lower transaction cos

3. Explain why dating can be considered a method to solve the adverse selection problem.
When a couple dates, they are (explicitly or implicitly) rõ ràng hoặc ẩn ý extracting
information about the significant other. At the same time, they are sharing information
about themselves.
4. Why are financial intermediaries willing to engage in information collection activities
when investors in financial instruments may be unwilling to do so?

Because they will reap all the benefits from the information they collect, their information
collection activities will be more profitable.Reduce asymmetric info and overcome the
problem of adverse selectionFor investors, the buying of information may have free-rider
problemFor the FI they make private loans => there is no free-ride
7. Suppose you have data about two groups of countries, one with efficient legal systems
and the other with slow, costly, and inefficient legal systems. Which group of countries
would you expect to exhibit higher living standards?

10. What steps can the government take to reduce asymmetric information problems and
help the financial system function more smoothly and efficiently?
Government requires firms to public and report info for investors, savers and the
publicRegulate monitor firms and relate partie

19. Explain how the separation of ownership and control in American corporations might
lead to poor management.
Separation of ownership: owner of the companies not be the managerConflict of
interest between shareholder and manager -> moral hazard problem