The Main Reason Why Banks Are the Leading Source of External

question 12

Multiple Choice

The main reason why banks are the leading source of external finance for businesses is

• A)the interest rates on bank loans are usually lower than interest rates on corporate bonds.
• B)banks have an information-cost advantage in reducing adverse selection problems.
• C)interest paid on bank loans is deductible against the corporate income tax, whereas interest paid on corporate bonds is not.
• D)government regulators encourage small businesses to obtain funding from banks.

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Definitions:

Trading Costs

Expenses associated with the buying and selling of assets in financial markets, including commissions, spreads, and slippage.

Heuristics

Mental shortcuts or rules of thumb that simplify decision-making processes, often used under conditions of uncertainty.

Decision-Making

The process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Overconfidence

This is a bias in behavioral finance where investors believe they have superior knowledge or capabilities, leading to overly optimistic assessments of their investment decisions.