Quizzes Global Banking
LECTURE 1
Q1 When FIs are useless or redundant
Never
Under very special conditions
When Modigliani miller does not hold
Always
Q2 what is adverse selection
The investors do not know the quality of the firms
The manager invests in petty projects
The firms have different project quality
None of the above
Q3 what is Moral Hazard?
Manger does not provide effort on the job
Manager invests in petty projects
Managers seeks M&A for empire building
All the above
Q4 A FI acting purely as a broker, can tackle only one problem. Which one?
Liquidity creation
Adverse selection
Moral hazard
None of the above
Q5 What is the function of FIs as asset transformer?
Transform low performing assets into high performing
Transform risky assets into safe assets
Transform long term assets into short-term assets
All of the above
Q6 why banks need special regulatory attention?
They have a lot of money
They are politically connected
They have negative externalities on the economies
They provide useful and important products
,Q7 assume there are two firms that want to issue shares. One firm is worth 50 the other firm
is worth 10. Investors do not know the quality of the firms. How much are rational investors
willing to pay
35
25
30
Impossible to say
Q8 considering that investors pay 30 for the shares, when the firm worth 50 is willing to issue
the shares
Never
Only if the payoff of its investment is higher than 20
Only if the payoff of its investment is higher than 50
Only if the payoff of its investment is higher than 30
LECTURE 2
Q1 given m the number of investors, K the per-borrower cost of monitoring, D
K+D < min [S, mK]
K + D < mk
K + D >min [S, mL]
K+D < S
Q2 when monitoring is not possible, what is the best contract that lenders can sign with
borrowers
Either debt or equity since they have the same effect
Equity contract
A combination between equity and debt contract
Debt contract
Q3 When monitoring is possible what is the best contract that the bank can sign with the
depositor and the borrowers (assuming sufficient diversification)?
Unmonitored debt with depositors and equity with borrowers
Unmonitored debt with depositors and monitored debt with borrowers
Unmonitored debt with depositors and borrowers
Monitored debt with depositors and unmonitored debt with borrowers
, Q4 a borrower needs 1usd to finance a project with uncertain realization V. The distribution
of V is known to everybody, it can be either V=1.3usd with probability 0.7 or V = 1usd with
probability 0.3. the actual realization of the project however is known only to the borrower.
Investors require a return of 6% on their lending. If monitoring is not possible, what is the
cost i.e. interest rate) of an unmonitored debt?
50,64%
53.23%
52.34%
51.42% (0.7f=1.6 -> f=1.5142) [0.7f=1.6 f=1.5142]
Q5 monitoring now is possible and one investor becomes the bank. There are two
independent and identical projects (i.e. with realization either V=1.3usd with probability 0.7
or V = 1usd with probability 0.3) to finance. What is the interest rate the bank will pay on
deposits
16.48% [(0.7*0,7)+(0*0.3)*2) B=1.06 B=1.1648]
17.42%
15.34%
15.89%
Q6 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e. with realizations either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate the bank charges on loans?
30.75%
33.67%
31.87%
32.96% [1+F = 2B 1+F=2.3296 F=1.3296]
Q7 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e., with realization either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate on loans that guarantees the bank
monitors, when cost of monitoring is K=0.0002 per borrower
33.87%
33.05% {[((0.7*0.3)*2)*(1+F-2B)=2K] F=1.3305}
34.67%
34.45%
LECTURE 1
Q1 When FIs are useless or redundant
Never
Under very special conditions
When Modigliani miller does not hold
Always
Q2 what is adverse selection
The investors do not know the quality of the firms
The manager invests in petty projects
The firms have different project quality
None of the above
Q3 what is Moral Hazard?
Manger does not provide effort on the job
Manager invests in petty projects
Managers seeks M&A for empire building
All the above
Q4 A FI acting purely as a broker, can tackle only one problem. Which one?
Liquidity creation
Adverse selection
Moral hazard
None of the above
Q5 What is the function of FIs as asset transformer?
Transform low performing assets into high performing
Transform risky assets into safe assets
Transform long term assets into short-term assets
All of the above
Q6 why banks need special regulatory attention?
They have a lot of money
They are politically connected
They have negative externalities on the economies
They provide useful and important products
,Q7 assume there are two firms that want to issue shares. One firm is worth 50 the other firm
is worth 10. Investors do not know the quality of the firms. How much are rational investors
willing to pay
35
25
30
Impossible to say
Q8 considering that investors pay 30 for the shares, when the firm worth 50 is willing to issue
the shares
Never
Only if the payoff of its investment is higher than 20
Only if the payoff of its investment is higher than 50
Only if the payoff of its investment is higher than 30
LECTURE 2
Q1 given m the number of investors, K the per-borrower cost of monitoring, D
K+D < min [S, mK]
K + D < mk
K + D >min [S, mL]
K+D < S
Q2 when monitoring is not possible, what is the best contract that lenders can sign with
borrowers
Either debt or equity since they have the same effect
Equity contract
A combination between equity and debt contract
Debt contract
Q3 When monitoring is possible what is the best contract that the bank can sign with the
depositor and the borrowers (assuming sufficient diversification)?
Unmonitored debt with depositors and equity with borrowers
Unmonitored debt with depositors and monitored debt with borrowers
Unmonitored debt with depositors and borrowers
Monitored debt with depositors and unmonitored debt with borrowers
, Q4 a borrower needs 1usd to finance a project with uncertain realization V. The distribution
of V is known to everybody, it can be either V=1.3usd with probability 0.7 or V = 1usd with
probability 0.3. the actual realization of the project however is known only to the borrower.
Investors require a return of 6% on their lending. If monitoring is not possible, what is the
cost i.e. interest rate) of an unmonitored debt?
50,64%
53.23%
52.34%
51.42% (0.7f=1.6 -> f=1.5142) [0.7f=1.6 f=1.5142]
Q5 monitoring now is possible and one investor becomes the bank. There are two
independent and identical projects (i.e. with realization either V=1.3usd with probability 0.7
or V = 1usd with probability 0.3) to finance. What is the interest rate the bank will pay on
deposits
16.48% [(0.7*0,7)+(0*0.3)*2) B=1.06 B=1.1648]
17.42%
15.34%
15.89%
Q6 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e. with realizations either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate the bank charges on loans?
30.75%
33.67%
31.87%
32.96% [1+F = 2B 1+F=2.3296 F=1.3296]
Q7 monitoring now is possible and one investor becomes the bank. Two independent and
identical projects (i.e., with realization either V=1.3usd with probability 0.7 or V=1usd with
probability 0.3) to finance. What is the interest rate on loans that guarantees the bank
monitors, when cost of monitoring is K=0.0002 per borrower
33.87%
33.05% {[((0.7*0.3)*2)*(1+F-2B)=2K] F=1.3305}
34.67%
34.45%
