Reference no: EM133077677

1) What is a transactions cost that could arise from screening?

2) What are restrictive covenants? Are they directed at adverse selection or moral hazard problems?

3) Does screening help minimize adverse selection of moral hazard problems? Explain briefly.

4) Joey's Bank decides to make loans only to agricultural firms. Explain the pros and cons of this decision in terms of diversification and specialization.

5) Banks commonly monitor the activities and check the credit ratings of borrowers. Which solves the moral hazard problem and which solves the adverse selection problem? Explain briefly.

6) Give an example of monitoring and restrictive covenants the bank might require if you took a loan from a bank to open a clothing store.

7) What is the free-rider problem in relation to the stock market?

8) Why is there a principal-agent problem for stock market investors?

9) Explain why some argue that collateral is used to minimize both adverse selection and moral hazard problems.

10) How does the free-rider problem affect the size of the firms with access to the IPO market?

11) How does compensating company managers with stock help with agency problems? What is the potential problem with this solution?

12) Credit rationing means that banks refuse to lend above a certain interest rate. Why would they do this? What does this policy have to do with adverse selection or moral hazard?

13) What does IPO stand for? What is it?

14) During the housing crisis of 2008, many homeowners went "under water," meaning their home is worth less than the value of their mortgage. What solution to asymmetric information problems is affected? Why is this a problem for lenders?