the economics of money, banking, and financial markets

237 #

© 2014 Pearson Canada Inc.#

15. 
    

    Debt contracts ____.
    A) are agreements by the borrowers to pay the lenders fixed dollar amounts at periodic intervals
    B) have a higher cost of state verification than equity contracts
    C) are used less frequently to raise capital than are equity contracts
    D) never result in a loss for the lender
    Answer: A
    Diff: 1 Type: MC Page Ref: 172 - 173
    Skill: Recall
    Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
    hazard

    
    


16. 
    

    Since they require less monitoring of firms, ____ contracts are used more frequently
    than ____ contracts to raise capital.
    A) debt; equity
    B) equity; debt
    C) debt; loan
    D) equity; stock
    Answer: A
    Diff: 1 Type: MC Page Ref: 173
    Skill: Recall
    Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
    hazard

    
    


17. 
    

    Explain the principal-agent problem as it pertains to equity contracts.
    Answer: The principals are the stockholders who own most of the equity. The agents are the
    managers of the firm who generally own only a small portion of the firm. The problem occurs
    because the agents may not have as much incentive to profit maximize as the stockholders.
    Diff: 1 Type: SA Page Ref: 171
    Skill: Recall
    Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
    hazard

    
    


18. 
    

    Explain the four tools that can help solve the principal-agent problem.
    Answer: These are: production of information monitoring, government regulation to increase
    information, financial intermediation and debt contracts.
    Diff: 1 Type: SA Page Ref: 171 - 172
    Skill: Recall
    Objective List: 8.1 Depict how asymmetric information results in adverse selection and moral
    hazard