Major Markets

Question 1

Are stocks the main source of external financing for businesses

Answer 1

No

Question 2

What is the most important source of external finance for businesses

Answer 2

Financial intermediaries like banks

Question 3

Can any corporation finance their activities through the securities market

Answer 3

No only the most well established

Question 4

What does it mean that a debt contract is colaterlaized

Answer 4

That property is pledged to secure a loan

Question 5

How does a mutual fund worke

Answer 5

It issues cheap shares and uses the cash to buy a diverse portfolio of large shares individuals might have a hard time aquiering

Question 6

How may risk and information costs affect the stock market

Answer 6

Bad firms are encouraged to sell their stock while good will not as the risk accounted price is above the worth of a bad one but below a good one

Question 7

What are some tools that mitigate adverse selection

Answer 7

Private procurement and sale of information, government enforcement of transparency, financial intermediation and collateral

Question 8

What is the free rider problem with private information gathering about the quality of stocks

Answer 8

If someone mimics and can get a foot in the door before those that pay for information they have less incentive to get the information in the first place. Time?

Question 9

Why are banks the most important source if financing for businesses

Answer 9

Because they are experts in assessing the credibility of the borrowers and they do not need to share their informations and actions so they have an incentive to research and lend fairly to those that are good

Question 10

Why do larger firms finance more directly

Answer 10

Because they are more known and thus people know what they get by buying them

Question 11

What is net worth

Answer 11

Net value if assets minus liabilities

Question 12

What is the moral hazard in the stock market

Answer 12

The principle agent problem, managers might have other plans when they have the cash

Question 13

Why is private monitoring not a good solution for the principle agent problem

Answer 13

Because it is expensive and who will pay, free rider problem

Question 14

How do governments fight moral hazard in the financial sysytem

Answer 14

They enforce accounting principles through law

Question 15

How can financial intermediaries like venture capitalists fight moral hazard

Answer 15

They have people on tue board and as their equity is non tradable there are no risk of free riders

Question 16

Why is the cost of verification low for debt

Answer 16

Because they only need to check if the borrowers miss payments

Question 17

What are the moral hazards with debt

Answer 17

Asset substitution and debt overhang

Question 18

What is the moral hazard with asset substitution

Answer 18

Firms may be tempted to invest their collateral in risky situations for greater equity which may hurt creditors

Question 19

What is the moral hazard with debt overhang

Answer 19

If the company is indebted investors may be reluctant to pay for project that would mostly gain creditors

Question 20

What are some solutions too moral hazard problems with debt

Answer 20

High rates of collateral which keeps its value , restrictive covenants which are contracts stating what the funds are allowed and not allowed to be spent on as well as monitoring through demanding reports, access too books and audits