Objective type questions on bond valuation

1. The largest source of external funds for U.S. firms is:

a. loans.

b. bonds.

c. trade debt.

d. stocks.

2. Asymmetric information occurs when:

a. each party has equal information.

b. one party in a transaction has more influence than another.

c. each party in a transaction gains from the transaction.

d. one party in a transaction has more information than another.

3. A bad credit risk seeks out loans more actively. This is a(n):

a. adverse selection problem.

b. liquidity problem.

c. moral hazard problem.

d. principal-agent problem.

4. A borrower engages in activities that are undesirable from a lender\'s point of view. This is the:

a. liquidity problem.

b. transaction costs problem.

c. moral hazard problem.

d. adverse selection problem.

5. The free-rider problem:

a. makes it easier for an investor to continue to buy securities at less than the true value.

b. is that people who do not pay for information take advantage of information other people have paid for.

c. will only occur if information costs are zero.

d. will make more people willing to provide information services.

6. The principal-agent problem:

a. occurs because owners have complete information about managers.

b. is not related to asymmetric information.

c. is a type of moral hazard.

d. eliminates costly state verification.

7. A financial crisis is not characterized by:

a. a disruption in financial markets caused by declines in asset prices.

b. failure of financial and non-financial firms.

c. an inability of financial markets to channel funds efficiently.

d. strong increases in economic activity.

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