Question : 11) Risk sharing profitable for financial institutions due to A) low : 1373636

11) Risk sharing is profitable for financial institutions due to

A) low transactions costs.

B) asymmetric information.

C) adverse selection.

D) moral hazard.

12) Typically, borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project. The difference in information is called

A) moral selection.

B) risk sharing.

C) asymmetric information.

D) adverse hazard

13) If bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of

A) moral hazard.

B) adverse selection.

C) free-riding.

D) costly state verification.

14) The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________.

A) adverse selection; moral hazard

B) moral hazard; adverse selection

C) costly state verification; free-riding

D) free-riding; costly state verification

15) Adverse selection is a problem associated with equity and debt contracts arising from

A) the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.

B) the lender’s inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.

C) the borrower’s lack of incentive to seek a loan for highly risky investments.

D) the borrower’s lack of good options for obtaining funds.

16) An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

A) adverse selection

B) moral hazard

C) risk sharing

D) credit risk

17) Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from

A) government agencies.

B) equities markets.

C) financial intermediaries.

D) bond markets.

18) The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.

A) Germany; Japan

B) Germany; Great Britain

C) Great Britain; Canada

D) Canada; Japan

19) Although the dominance of ________ over ________ is clear in all countries, the relative importance of bond versus stock markets differs widely.

A) financial intermediaries; securities markets

B) financial intermediaries; government agencies

C) government agencies; financial intermediaries

D) government agencies; securities markets

20) Because there is an imbalance of information in a lending situation, we must deal with the problems of adverse selection and moral hazard.  Define these terms and explain how financial intermediaries can reduce these problems.