FI 412 Exam 2 2025 (Chapters 7, 9, 11) – Homework Questions Study
Guide & Review
Collateral - correct answer ✔✔ ____ is property that is pledged to a lender to guarantee
payment in the event that the borrower is unable to make debt payments.
A. long legal documents with substantial provisions - correct answer ✔✔ Debt Contracts are
A. long legal documents with substantial provisions
B. very simple legal documents that place restrictions on the borrower.
C. established by borrowers to differentiate themselves from other individuals or firms.
D. meant to guide relatively small businesses obtain some additional investment.
Financial Intermediaries - correct answer ✔✔ are the most important source of external funds
to finance businesses.
banks - correct answer ✔✔ Relatively smaller
companies are more likely than large, well-known to acquire funds through
B. Financial intermediaries are able to operate with lower transaction costs relative to individual
lenders or borrowers. - correct answer ✔✔ How can economies of scale help explain the
existence of financial intermediaries ?
A. Financial intermediaries are relatively large institutions.
,B. Financial intermediaries are able to operate with lower transaction costs relative to individual
lenders or borrowers.
C. Financial intermediaries have exclusive access to communications technology in the financial
sector.
D. Financial intermediaries with their vault technology can specialize in keeping deposits safe.
C. They pool many small deposits together and specialize in loan risk assessment and other
forms of expertise. - correct answer ✔✔ Describe two ways in which financial intermediaries
help lower transaction costs in the economy.
A. They attract funds from many depositors and only make loans available to large-scale
borrowers.
B. They accept only large-denomination deposits and make only a small number of large loans.
C. They pool many small deposits together and specialize in loan risk assessment and other
forms of expertise.
D. They offer safety-deposit box services to depositors and make only a few loans per year.
B. asymmetric information - correct answer ✔✔ The inequality of information between
borrowers and lenders in financial markets is broadly known as:
A. moral hazard.
B. asymmetric information.
,C. adverse selection.
D. noncollateralized risk.
D. moral hazard; adverse selection - correct answer ✔✔ Problems created by asymmetric
information after the transaction occurs is called ________, while the problem created before a
transaction occurs is called ________.
A. free riding; costly state verification
B. adverse selection; moral hazard
C. costly state verification; free riding
D. moral hazard; adverse selection
D. lenders cannot distinguish good firms from bad. - correct answer ✔✔ The "lemons problem"
applies to financial markets for many reasons including the fact that
A. the market is large and efficient.
B. only safe borrowers sell securities.
C. borrowers know less about the probability of default than lenders.
D. lenders cannot distinguish good firms from bad.
, C. monitoring of activities of the risky party after the transaction - correct answer ✔✔ The tool
to solve adverse selection problems are the following except
A. private production and sale of information
B. financial intermediation
C. monitoring of activities of the risky party after the transaction
D. government regulation to increase information
Free rider problem - correct answer ✔✔ ____ is an issue that occurs when people who do not
pay for information take advantage of the information that other people have paid for
A. making private, nontraded loans so other lenders cannot benefit from the information they
have
collected about the borrower. - correct answer ✔✔ Banks reduce the free-rider problem in
information production by
A. making private, nontraded loans so other lenders cannot benefit from the information they
have
collected about the borrower.
B. serving as an intermediary that holds scarcely any nontraded loans.
C. charging others for information about the financial condition of potential borrowers.
D. buying tradable securities with their depositors' funds.
Guide & Review
Collateral - correct answer ✔✔ ____ is property that is pledged to a lender to guarantee
payment in the event that the borrower is unable to make debt payments.
A. long legal documents with substantial provisions - correct answer ✔✔ Debt Contracts are
A. long legal documents with substantial provisions
B. very simple legal documents that place restrictions on the borrower.
C. established by borrowers to differentiate themselves from other individuals or firms.
D. meant to guide relatively small businesses obtain some additional investment.
Financial Intermediaries - correct answer ✔✔ are the most important source of external funds
to finance businesses.
banks - correct answer ✔✔ Relatively smaller
companies are more likely than large, well-known to acquire funds through
B. Financial intermediaries are able to operate with lower transaction costs relative to individual
lenders or borrowers. - correct answer ✔✔ How can economies of scale help explain the
existence of financial intermediaries ?
A. Financial intermediaries are relatively large institutions.
,B. Financial intermediaries are able to operate with lower transaction costs relative to individual
lenders or borrowers.
C. Financial intermediaries have exclusive access to communications technology in the financial
sector.
D. Financial intermediaries with their vault technology can specialize in keeping deposits safe.
C. They pool many small deposits together and specialize in loan risk assessment and other
forms of expertise. - correct answer ✔✔ Describe two ways in which financial intermediaries
help lower transaction costs in the economy.
A. They attract funds from many depositors and only make loans available to large-scale
borrowers.
B. They accept only large-denomination deposits and make only a small number of large loans.
C. They pool many small deposits together and specialize in loan risk assessment and other
forms of expertise.
D. They offer safety-deposit box services to depositors and make only a few loans per year.
B. asymmetric information - correct answer ✔✔ The inequality of information between
borrowers and lenders in financial markets is broadly known as:
A. moral hazard.
B. asymmetric information.
,C. adverse selection.
D. noncollateralized risk.
D. moral hazard; adverse selection - correct answer ✔✔ Problems created by asymmetric
information after the transaction occurs is called ________, while the problem created before a
transaction occurs is called ________.
A. free riding; costly state verification
B. adverse selection; moral hazard
C. costly state verification; free riding
D. moral hazard; adverse selection
D. lenders cannot distinguish good firms from bad. - correct answer ✔✔ The "lemons problem"
applies to financial markets for many reasons including the fact that
A. the market is large and efficient.
B. only safe borrowers sell securities.
C. borrowers know less about the probability of default than lenders.
D. lenders cannot distinguish good firms from bad.
, C. monitoring of activities of the risky party after the transaction - correct answer ✔✔ The tool
to solve adverse selection problems are the following except
A. private production and sale of information
B. financial intermediation
C. monitoring of activities of the risky party after the transaction
D. government regulation to increase information
Free rider problem - correct answer ✔✔ ____ is an issue that occurs when people who do not
pay for information take advantage of the information that other people have paid for
A. making private, nontraded loans so other lenders cannot benefit from the information they
have
collected about the borrower. - correct answer ✔✔ Banks reduce the free-rider problem in
information production by
A. making private, nontraded loans so other lenders cannot benefit from the information they
have
collected about the borrower.
B. serving as an intermediary that holds scarcely any nontraded loans.
C. charging others for information about the financial condition of potential borrowers.
D. buying tradable securities with their depositors' funds.
