Lecture 1

When FIs are useless or redundant?

• Never

• Under very special conditions

• When Modigliani-Miller does not hold

• Always

What is adverse selection?

• The investors do not know the quality of the firms

• The manager invests in petty projects

• The firms have different project quality

• None of the above

What is moral hazard?

• The manager does not provide effort on the job

• The manager invests in petty projects

• The manager seeks M&A for “empire building”

• All of the above

A FI acting only as a broker tackles only one problem. Which one?

• Liquidity creation

• Adverse selection

• Moral hazard

• None of the above

What is the function of the FIs as asset transformer?

• Transform low performing assets into high performing assets

• Transform risky assets into safe assets

• Transform long-term assets into short-term assets

• All of the above

Why banks needs special regulatory attention?

• They have a lot of money

• They are politically connected

• They have negative externalities on the economy

• They provide useful and important products

Assume there are two firms that want to issue shares

One firm is worth $50, the other firm is worth only $10

Investors do not know the quality of the firms

How much rational investors are willing to pay?

• $35

• $25

• $30

• Impossible to say

Considering that investors pay $30 for the shares, when the firm worth $50 is willing to issue the shares?

• Never

• Only if the payoff of its investment is higher than $20

• Only if the payoff of its investment is higher than $50

• Only if the payoff of its investment is higher than $30