Question

just some auestions from an exam review. a small explanation would be great!

Bubbles in stock prices are generated due to:

Select one:

- Investors widespread belief in an increase in future dividends.

- Investors psychological factors, as herding behavior and optimism bias.

- The good consequences bubbles have on countries’ economies.

- All of the above.

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

Select one:

- May not get lower interest rates in new loans due to the bank´s information monopoly.

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

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

- All of the above

Answer 1

Bubbles in stock prices are generated due to several reasons few of them are belief in future dividends from the company which derives the market value of shares far above its intrinsic value, Bubbles are also generated due to the psychological factors like herding behavior where people invest or disinvest due to the group thinking and group actions. Thus Bubble in stock prices can have good consequences on the countries economies. and hence the answer would be the last option i.e, All of the above.

Asymmetric Information occurs when borrower has more information about his financial state than the lender does. thus to account for this asymmetric information, lender will charge a risk premium to compensate for the disparity in information. however good reputation firm are low risk borrowers, as they do pay their loan on time. Thus option 3 is true