Analysis of Adverse Selection Indicates That Financial Intermediaries,especially Banks

question 83

Multiple Choice

Analysis of adverse selection indicates that financial intermediaries,especially banks

• A)have advantages in overcoming the free-rider problem,helping to explain why indirect finance is a more important source of business finance than is direct finance.
• B)despite their success in overcoming free-rider problems,nevertheless play a minor role in moving funds to corporations.
• C)provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds.
• D)must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

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Definitions:

Book Value

The net value of a company's assets subtracting the total liabilities, often used to assess a company's worth or the value of individual assets.

Salvage Value

The estimated resale value of an asset at the end of its useful life.

Cost Savings

Reductions in costs achieved through methods such as efficiency improvements, negotiations for better prices, or elimination of unnecessary expenses.

Product Line

A series of related products offered by a company, often serving a common market or purpose.