Stock Options

Go to http://www.businessweek.com/magazine/content/ 02_09/b3772049.htm to view the article "Too Much of a Good Incentive." This article discusses current issues related to stock option compensation.

After reading this article, answer the following questions:

1. What factors did the author suggest caused problems with options being granted to companies in the late 1990s?

2. What is the controversy related to having companies expense options when they are given rather than the current method of not recording an expense?

3. What does the author suggest is the real cost associated with options that is not recognized when the options are granted?

1. a. Real b. Financial c. Real d. Real e. Financial

2. If the new technology enables investors to trade and perform research for themselves, the need for financial intermediaries will decline. Part of the service intermediaries now offer is a lower-cost method for individuals to participate in securities markets. This part of the intermediaries' service would be less sought after.

3. a. Used cars trade in dealer markets (used-car lots or auto dealerships) and in direct search markets when individuals advertise in local newspapers.

b. Paintings trade in broker markets when clients commission brokers to buy or sell art for them, in dealer markets at art galleries, and in auction markets.

c. Rare coins trade mostly in dealer markets in coin shops, but they also trade in auctions and in direct search markets when individuals advertise they want to buy or sell coins.

4. a. The pass-through agencies are far better equipped to evaluate the credit risk associated with the pool of mortgages. They are constantly in the market, have ongoing relationships with the originators of the loans, and find it economical to set up "quality control" departments to monitor the credit risk of the mortgage pools. Therefore, the pass-through agencies are better able to incur the risk; they charge for this "service" via a "guarantee fee." Investors might not find it worthwhile to purchase these securities if they must assess the credit risk of these loans for themselves. It is far cheaper for them to allow the agencies to collect the guarantee fee. b. In contrast to mortgage-backed securities, which are backed by large numbers of mortgages, Brady bonds are backed by large government loans. It is more feasible for the investor to evaluate the credit quality of a few governments than it is to evaluate dozens or hundreds of individual mortgages.

Organizing Your Debt

Organizing Your Debt

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