CFA Practice Question

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CFA Practice Question

John, an independent board member of company A, borrows $1 million from A at the prevailing market rate of 5.6% to finance his own independent start-up company. Should this situation be considered an appropriate corporate governance practice?

A. Yes, as he pays the prevailing interest rate.
B. No, because this is a related party transaction.
C. No, because this creates a conflict of interest.
Correct Answer: C

The company should not lend the money to John, regardless of whether he pays the market interest rate. Any appearance of a conflict of interest should be avoided.

User Contributed Comments 5

User Comment
zeiad any appearance of conflict of interest shoud be avoided
abhinavkapoor what if the company's nature of business is lending funds, such as banks? would the same rule apply then? Can sombody confirm?
johntan1979 That's even worse.
SalimBouch worse? why? if he got the market interest rate?
Inaganti6 Probably because in this case it could be the company's money whereas with a bank theres a high chance it has origins from public deposits.
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