Some Claim That Ratings Agencies Have a Conflict of Interest

question 59

Multiple Choice

Some claim that ratings agencies have a conflict of interest since:

• A)they rate the quality of their own bonds
• B)since agencies charge firms for their services rather than investors, they have an incentive to give high ratings to gain business
• C)government began to include bond ratings as part of regulations of mutual funds, banks, and financial firms
• D)they issued many of the mortgages that were later securitized into bonds

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Definitions:

Retained Earnings

The portion of net income that is not distributed to shareholders as dividends but is kept by the company for reinvestment.

Total Assets

The sum of all resources owned by a company, valued in monetary terms.

Deferral

A financial term referring to the postponement of the recognition of certain revenues or expenses to a later accounting period.