1. Which of the following is most likely to suffer from the \"lemon\" problem A.
ID: 1220062 • Letter: 1
Question
1. Which of the following is most likely to suffer from the "lemon" problem
A. Using bonds to finance oil exploration in Uzbekistan B. Using bonds to finance oil exploration in Saudi Arabia C. Using bonds to finance improvement to new drug D. All the answer is correct
2. When conflicts of interest arise in the bond-rating industry
A. bond-rating fiems issue low ratings to bad-quality securities B. savers can potentially lose a lot of money. C. the quality of securities traded in securities markets increase D. savers benefit from these conflicts of interest
3. Normally, the bond market is less susceptible to adverse selection than the stock market, except:
A. when asymmetric information is an issue B. when moral hazard is high C. when the risk of bond default is high D. when the stock market is in a bubble
4. In asymmetric information, we call the party who has information about her actions the_______ and the other, imperfectly informed party, the______
A. agent; principal B. principal; trader C. saver; investor D. boss; employee
5. Suppose you take out a loan to buy a small plane for your aerial sightseeing company and you pledge the plane as collateral. When the bank requires that the plane cannot be used in acrobatic competitions, it is effectively including a _______ in the loan contract.
A. negative covenant B. negative collateral C. positive covenant D. positive collateral
Explanation / Answer
1. A. Using bonds to finance oil exploration in Uzbekistan.
2. When conflicts of interest arise in the bond-rating industry- A. bond-rating fiems issue low ratings to bad-quality securities.
3. Normally, the bond market is less susceptible to adverse selection than the stock market, except: A. when asymmetric information is an issue.
4. A. Agent, principal.
5.B. Negative collateral.
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