What are transaction costs and how can they be reduced by exploiting economies of scale?
Why do higher interest rates increase adverse selection in the loan market?
Distinguish symmetric information with asymmetric information, and state why the distinction is important for the financial system.
What is the difference between moral hazard and adverse selection? How does each contribute to making information asymmetric?
How is information collection in financial markets is subject to the free rider problem? How do banks overcome the free rider problem?
Explain, verbally and graphically, what the "lemons problem" is. How does the lemons problem lead many firms to borrow from banks rather than from individual investors?
Why might the number of loans that aren't repaid to banks rise as interest rates rise? What might be a better strategy for banks than raising interest rates?
Suppose that a bank makes a loan to a business and that the loan contract specifies that the business is not to engage in certain lines of business. What is this type of provision called? Why would the bank make such a provision?
What is the name of the main problem associated with the separation of ownership and management? What do managers do that owners don't like? What types of solutions are available?
Is a large firm with thousands of shareholders more or less likely to suffer a principal-agent problem than a small firm with just a few shareholders? Explain.
Why don't insurance companies sell income insurance? That is, if a person loses his or her job or doesn't get as big of a raise as anticipated, that person would be compensated under his or her insurance coverage.
Differentiate between investment bankers and securities brokers.
Define contractual saving. How do insurance companies know how high their premiums should be for life and accident insurance? What kinds of problems do they face in assessing risk?
CircleLending is a new Massachusetts-based company that administers loans between family members and friends. The interest rates are lower than the market rates. Listen to this NPR story about the company, and then evaluate its business in terms of transaction and information costs, and default and credit risks. Why is there a disparity between CircleLoan's rates and market interest rates? When might it make sense for a parent to loan money to a child (via CircleLending) even after a bank may have rejected the child's loan application?
Why do higher interest rates increase adverse selection in the loan market?
Distinguish symmetric information with asymmetric information, and state why the distinction is important for the financial system.
What is the difference between moral hazard and adverse selection? How does each contribute to making information asymmetric?
How is information collection in financial markets is subject to the free rider problem? How do banks overcome the free rider problem?
Explain, verbally and graphically, what the "lemons problem" is. How does the lemons problem lead many firms to borrow from banks rather than from individual investors?
Why might the number of loans that aren't repaid to banks rise as interest rates rise? What might be a better strategy for banks than raising interest rates?
Suppose that a bank makes a loan to a business and that the loan contract specifies that the business is not to engage in certain lines of business. What is this type of provision called? Why would the bank make such a provision?
What is the name of the main problem associated with the separation of ownership and management? What do managers do that owners don't like? What types of solutions are available?
Is a large firm with thousands of shareholders more or less likely to suffer a principal-agent problem than a small firm with just a few shareholders? Explain.
Why don't insurance companies sell income insurance? That is, if a person loses his or her job or doesn't get as big of a raise as anticipated, that person would be compensated under his or her insurance coverage.
Differentiate between investment bankers and securities brokers.
Define contractual saving. How do insurance companies know how high their premiums should be for life and accident insurance? What kinds of problems do they face in assessing risk?
CircleLending is a new Massachusetts-based company that administers loans between family members and friends. The interest rates are lower than the market rates. Listen to this NPR story about the company, and then evaluate its business in terms of transaction and information costs, and default and credit risks. Why is there a disparity between CircleLoan's rates and market interest rates? When might it make sense for a parent to loan money to a child (via CircleLending) even after a bank may have rejected the child's loan application?
posted by Chris at 4:43 PM
