I. Multiple choice.
1. Which of the following is acontractual saving institution?
A. A life insurance company
B. A credit union
C. A savings and loanassociation
D. A mutual fund
2. Which of the following canbe described as involving indirect finance?____________
A. A bank buys a U.S. treasurybill from one of its depositors
B. A corporation buyscommercial paper issued by another corporation
C. A pension fund manager buys commercialpaper in the primary market
D. Both A and C
3. The purpose of diversificationis to ________________.
A. raise the volatility of a portfolio’sreturn
B. reduce the volatility of a portfolio’sreturn
C. reduce the average return ona portfolio
D. raise the average return ona portfolio
4. An investor who puts all thefunds into one asset _____________her portfolio’s ____________.
A. increases; diversification
B. increases; average return
C. decreases; diversification
D. decreases; average return
5. Through risk-sharingactivities, a financial intermediary _______________its own risk and______________the risks of its customers.
A. reduces; increases
B. increases; increases
C. reduces; reduces
D. increases; reduces
6. The presence of___________in financial markets leads to adverse selection and moral hazardproblems that interfere with the efficient functioning of financial markets.
A. non-collateralized risk
B. free riding
C. asymmetric information
D. costly state verification
7. Successful financialintermediaries have higher earnings from their investments because they arebetter equipped than individuals to screen out good from bad risks, therebyreducing losses due to ______________.
A. moral hazard
B. adverse selection
C. bad luck
D. financial panic
8. Financial institutions________________.
A. exist because there are substantialinformation and transaction costs in the economy.
B. help reduce the exposureof investors to risk
C. are involved in the processof indirect finance
D. do all of the above
9. When the lender and theborrower have different amounts of information regarding a transaction,____________is said to exist.
A. adverse selection
B. asymmetric information
C. moral hazard
D. fraud
10. When the potentialborrowers who are the most likely to default are the ones most actively seekinga loan, _____________is said to exist.
A. asymmetric information
B. adverse selection
C. moral hazard
D. fraud
II Define briefly the following terms andconcepts.
1.asymmetric information
2.adverse selection
3.moral hazard
4.risk sharing
5.diversification
6.maturity intermediation
III Translate the following sentences intoChinese.
1. Transaction cost, the time andmoney spent in carrying out financial transactions, is a major problem for peoplewho have excess fund to lend.
2. In financial markets, one partyoften does not know enough about the other party to make accurate decisions.This inequality is called asymmetric information. Lack of information createsproblems: adverse selection and moral hazard.
3. Adverse selection in financialmarket occurs when the potential borrowers who are the most likely to producean undesirable(adverse) outcome—thebad credit risks—are the ones who most activelyseek out a loan and are thus most likely to be selected.
4. Moral hazard in financial marketsis the risk (hazard)that the borrower might engage in activities that are undesirable(immoral) from the lender’s point of view because they make it less likely thatloan will be paid back.
5. Financialinstitutions fall into three categories: depository institutions, contractual savinginstitutions and investment intermediaries.
6. Diversification entails investingin a collection (portfolio) of assets whose returns do not always move together,with the result that overall risk is lower than that for individual asset.
IV Translate the followingsentences into English.
1. 通过金融中介机构间接融资的过程叫作金融媒介，这是将资金从贷方转移到借方的基本渠道。
2. 成功的金融中介机构在投资上能获得较高收益的原因是它们在甄别贷款风险从而降低由逆向选择造成的损失方面有着丰富的经验。
3. 政府对金融体系进行监管主要有三个方面的原因—增加投资者可获得的信息、确保金融体系的稳健和提高货币政策的控制力。
4. 信息不对称可能导致金融中介机构的大面积倒闭，即产生金融恐慌。
5. 金融中介机构的低交易成本意味着它可以向客户提供使客户可以很容易进行交易的流动性服务。
