Question : 8.7   Conflicts of Interest 1) The presence of economies of scope : 1373704

 

8.7   Conflicts of Interest

 

1) The presence of economies of scope may benefit financial institutions but may create potential costs from ________.

A) conflicts of interest

B) multiple profitable enterprises

C) economies of scale

D) unsecured debt

2) Because conflicts of interest increase asymmetric information problems

A) the economy will not operate as efficiently.

B) loans will not be made.

C) banks will not be able to make a profit.

D) the financial markets will operate more smoothly.

 

3) Investment banks ________ companies issuing securities and ________ these securities by selling them to the public on behalf of the issuing companies.

A) research; underwrite

B) research; monitor

C) monitor; underwrite

D) monitor; manipulate

 

4) A conflict of interest arises in investment banking because the banks are attempting to simultaneously serve two client groups

A) the security-issuing firms and the security-buying investors.

B) the government and the stockholders.

C) the government and the security-issuing firms.

D) the security-issuing firms and the lawyers.

 

5) The practice of ________ is allocating initially underpriced initial public offerings to executives in companies the investment bank hopes to do underwriting business with in the future.

A) discounting

B) spinning

C) peppering

D) wiring

 

6) A conflict of interest can occur for accounting firms when the firms both

A) provide auditing services and nonaudit consulting services.

B) provide nonaudit services and tax advice.

C) enter data and record data.

D) monitor data and underwrite securities.

 

7) Credit-rating agencies may face a conflict of interest because they

A) both advise clients on how to structure debt issues and determine the creditworthiness of the debt issues.

B) underwrite securities and advise clients on how to structure debt issues.

C) underwrite securities and determine the creditworthiness of the debt issues.

D) both advise clients on how to structure debt issues and write restrictive covenants.

8) The fact that the credit-rating agencies both advised clients on how to structure the financial instruments that paid out cash flows from subprime mortgages and also rated these financial instruments contributed to the

A) subprime financial crisis that began in 2007.

B) Enron collapse.

C) demise of Arthur Andersen.

D) technology bust.

 

9) All of the following are credit-rating agency reforms proposed by the SEC in 2008 except

A) prohibit credit-rating agencies from structuring the same products that they rate.

B) disclose historical ratings performance.

C) differentiate the ratings on structured products from those issued on bonds.

D) sever links between research and securities underwriting.

 

10) The Sarbanes-Oxley Act of 2002 increased supervisory oversight by

A) giving the FDIC the authority to review independent audits.

B) increasing the SEC’s budget to supervise securities markets.

C) creating a new Department of Conflict Resolution.

D) reducing the penalties for obstruction of an official investigation.

 

 

11) While Sarbanes-Oxley is designed to reduce the problems caused by conflicts of interest critics say that it might diminish economies of scope and

A) reduce information in financial markets.

B) encourage IPOs in the U.S.

C) encourage smaller firms to list on the U.S. financial markets.

D) increase U.S. capital markets relative to those abroad.

 

12) The Global Legal Settlement of 2002 required investment banks to separate ________ and ________.

A) research; securities underwriting

B) deposits; securities underwriting

C) research; legal analysis

D) deposits; legal analysis

 

13) What three types of financial service activities have led to serious conflict of interest problems in financial markets in recent years?