Which of the Following Is an Example of How Incentive

question 170

Multiple Choice

Which of the following is an example of how incentive structures contributed to the collapse of investment banks?

• A) The bonus structures of most executives were tied to short-term profitability.
• B) The rating agencies acted independently in assigning ratings to mortgage-backed securities and had no incentive to understate the risks.
• C) Mortgage-backed securities were closely scrutinized in order to minimize risk and obtain higher ratings.
• D) Despite SEC regulations, investment banks kept leverage ratios low in order to increase profits.

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Definitions:

Bank Statement

A document issued by a bank detailing transactions, withdrawals, deposits, and the beginning and ending balance for an account over a specific period.

Reconcile

The process of ensuring that two sets of records or accounts are in agreement.

APR

Annual Percentage Rate; the annual rate that is charged for borrowing, representing the actual yearly cost of funds over the term of a loan.

Compounded Weekly

Refers to the process of calculating interest on both the initial principal and the accumulated interest from previous periods on a weekly basis.