Question 1

During 2007,many "subprime" and "Alt-A" borrowers began to default on their mortgages.Describe "subprime" and "Alt-A" borrowers.

Accepted Answer

The answer of During 2007,many "subprime" and "Alt-A" borrowers began...

Question 2

Snap became the first firm in the history of U.S.financial markets to have an IPO that consisted entirely of non-voting shares.

Accepted Answer

This is true. Snap's IPO in 2017 consisted entirely of non-voting shares, which means that shareholders had no voting rights in the company's decisions. This was a first in U.S. financial markets history.

Question 3

What was the source of the problems encountered by many financial firms during the late 2000s?

Accepted Answer

The answer of What was the source of the problems...

Question 4

The Sarbanes-Oxley Act was passed in response to the 2007-2009 financial crisis.

Accepted Answer

The Sarbanes-Oxley Act was passed in 2002, in response to corporate accounting scandals such as Enron and WorldCom, not the 2007-2009 financial crisis.

Question 5

Why do financial markets depend on accurate accounting and disclosure practices?

Accepted Answer

The answer of Why do financial markets depend on accurate...

Question 6

Why do corporate boards of directors sometimes link top managers' compensation to the corporations' stock prices? How might tying compensation too closely to stock prices create an incentive for corporate fraud.

Accepted Answer

The answer of Why do corporate boards of directors sometimes...

Question 7

The principal-agent problem is

Accepted Answer

The principal-agent problem refers to the conflict of interest that arises between a principal (owner) and an agent (manager) who acts on behalf of the principal. In partnerships, the number of partners is usually small, and the partners often have personal relationships and trust one another, which may make it easier to monitor and control the behavior of agents. In contrast, corporations have a large number of shareholders who may not have personal relationships or direct communication with management, which can create a greater risk of agency problems. Therefore, the principal-agent problem is often less severe for partnerships than for corporations.

Question 8

If top managers make good decisions,the firm's profits will be ________,and the firms assets will be ________.

Accepted Answer

If top managers make good decisions, the firm's profits will be high and this will contribute to the growth of the firm's assets. This will result in the firm having large assets relative to its liabilities.

Question 9

Briefly describe the Sarbanes-Oxley Act and explain why it was passed.

Accepted Answer

The answer of Briefly describe the Sarbanes-Oxley Act and explain...

Question 10

The legislation passed in 2010 that was intended to reform regulation of the financial system was the

Accepted Answer

The Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act, was passed in 2010 with the aim of reforming regulation of the financial system in response to the 2008 financial crisis. The act established new rules and regulations for banks, created a new agency to protect consumers from predatory financial practices, and sought to increase transparency and accountability in the financial industry.

Question 11

The Sarbanes-Oxley Act of 2002 requires that each member of the board of directors personally certify the accuracy of financial reports.

Accepted Answer

The answer of The Sarbanes-Oxley Act of 2002 requires that...

Question 12

Alt-A mortgages are

Accepted Answer

Alt-A mortgages are also known as "low documentation" or "liar loans" because borrowers provide less documentation about their income and assets, making it easier for them to qualify for larger mortgages. This makes them riskier than traditional mortgages, as there is less information about the borrower's ability to repay the loan.

Question 13

The Dodd-Frank Act requires that each member of the board of directors personally certify the accuracy of financial reports.

Accepted Answer

The Dodd-Frank Act does not require each member of the board of directors to personally certify the accuracy of financial reports. Instead, it primarily focuses on financial regulatory reforms and does not include such a specific certification requirement for board members. The Sarbanes-Oxley Act, however, requires the CEO and CFO to certify the accuracy of financial reports.

Question 14

The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of financial reports.

Accepted Answer

The Sarbanes-Oxley Act of 2002 does require CEOs (and CFOs) to personally certify the accuracy of financial reports.

Question 15

Mortgage-backed securities are similar to bonds in that the investor who buys one receives

Accepted Answer

Mortgage-backed securities provide regular interest payments to investors who purchase them. They are not insured by the federal government, do not offer ownership in the issuing company, and do not typically provide dividend payments.

Question 16

Mortgage-backed securities are groups of mortgages that are bundled together and sold to investors.

Accepted Answer

Mortgage-backed securities are indeed bundled groups of mortgages that are sold to investors. This is a way for lenders to raise capital by selling the rights to future mortgage payments. The investors make money through the interest payments on the mortgages.

Quiz 6: Firms, The Stock Market, and Corporate Governance