Credit Markets Assignment

Credit Markets Assignment

In credit markets with asymmetric information:

a) Lenders may formulate sets of incentive compatible contracts that consider collateral and interest rates simultaneously as a mechanism to reveal the borrower’s ex ante risk level.

b) By offering two incentive compatible contracts, lower risk borrowers mainly choose contracts with higher collateral and lower interest rates.

c) Relationship lending would improve banks’ information on firms and their projects, providing firms with reputation, and reducing the risk for the bank to grant a loan.

d) All of the above.

31. Organized stock secondary markets:

a) Have been designed to get close to the perfect competition market described in microeconomics

b) Have the goal of reaching asset equilibrium prices that equal their values.

c) All investors, e.g. the Prime Minister or a University of Valencia student, are legally obliged to comply with the same rules

d) All of the above.

32. In credit markets with asymmetric information, relationship lending improves banks’ information on the firm, providing a firm with a reputation. Good reputation firms:

a) May not get lower interest rates in new loans due to the bank’s information monopoly.

b) Should build relationship lending with 2 or more banks in order to generate competition between banks, and avoid a bank’s information monopoly.

c) Are low risk borrowers, that is to say, borrowers that likely repay their loans back on time

d) All of the above

33. Organized stock secondary markets provide:

a) A price of equilibrium for each traded stock that comes from its supply and demand.

b) Liquidity to the traded assets.

c) Information about the traded assets.

d) All of the above. ot equilibrium: Get Finance homework help today

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