Deck 18: Investment Banking

Question 1

Discount brokers offer investment advice at prices below full-service security brokerage houses.

Answer 1

False

Question 2

A dealer earns a commission for bringing buyers and sellers together.

Answer 2

False

Question 3

Under the Glass-Steagall Act commercial banks were permitted to underwrite and trade Federal government securities and general obligation bonds of states and municipalities.

Answer 3

True

Question 4

An underwriter's selling group assumes underwriter risk.

Question 5

Security brokers and dealers obtain most of their funds from customers and banks.

Question 6

A security underwriting takes place in the primary market; subsequent trading in the security takes place in the secondary market.

Question 7

The Glass-Steagall Act of 1933 has eliminated banks from any underwriting activities.

Question 8

A best efforts sale of securities is likely to generate more revenue for the investment banker than an equivalent underwriting of securities.

Question 9

Venture capital recipients are often called angels.

Question 10

Seed financing is the first stage of venture capital financing.

Question 11

Before the Financial Services Modernization Act of 1999, the Supreme Court (1988) of the U.S. provided commercial banks permission to underwrite commercial paper and municipal revenue bonds but not equities.

Question 12

The Banking Act of 1933, known as the Glass-Steagall Act, has effectively kept commercial banks out of the commercial lending area.

Question 13

Investment banking operations occur in the direct financial market.

Question 14

Mezzanine or bridge financing is the interim financing before public offerings of securities.

Question 15

Venture capital firms compete with commercial banks for new business loans.

Question 16

Investment banking firms provide both financing and investment services for borrowers and lenders, respectively.

Question 17

Venture capital financing usually entails some managerial involvement and equity ownership.

Question 18

The Glass-Steagall Act of 1933 allowed firms engaged in investment banking to simultaneously engage in commercial banking.

Question 19

The 40% margin rule requires the buyer/seller of a security to provide at least 60% of the funds necessary to cover the transaction, borrowing 40%.

Question 20

SEC Rule 144A permitted borrowers in private placements the opportunity to trade their obligations.

Question 21

Which of the following is true about private placement?

A) The underwriting function is avoided.
B) The extremes of high credit quality firms and low or unknown credit quality firms use private placements.
C) The terms may be negotiated between the issuer and the investors.
D) The sale of securities must be restricted to a small group of accredited investors.
E) All of the above is true.

Question 22

The Glass-Steagall Act of 1933 separated

A) insurance from credit.
B) investment banking from mutual funds.
C) investment banking from commercial banking.
D) insurance from mutual funds.

Question 23

Full-service brokerage service includes

A) origination, underwriting, and sales.
B) registration of securities, storage of securities, and execution of trades.
C) execution of trades, investment advice, and margin credit.
D) cash management service, private placements, and security distribution.

Question 24

One of the major causes of financial crisis is the subprime mortgage loans that are facilitated by investment banks.

Question 25

All of the following are associated with the origination function of investment banking except

A) design of the security to fit the needs of the market and the issuing firms.
B) filing of the required registration statements.
C) obtain a credit rating on a debt issue.
D) commit to a specific price to the issuing firm and attempt to sell the security in the market.

Question 26

All of the following were the objectives of the Glass-Steagall Act except

A) discouraging speculation in financial markets.
B) limiting bank mergers when the merger might adversely affect competition.
C) preventing conflict of interest and self-dealing.
D) restoring confidence in the commercial banking system.
E) All of the above were the objectives of the Glass-Steagall Act.

Question 27

All of the following are the major services of investment banking firms except

A) making commercial loans
B) bringing new security issues to market
C) trading securities
D) brokerage

Question 28

SEC Rule144A may lower the cost of private placement financing for corporations for it

A) places an interest rate ceiling on private placement financing.
B) permits trading in private placement securities after a two-year wait, enhancing the liquidity of the investment.
C) permits sophisticated institutional investors to invest in private placement securities.
D) permits the trading of private placement trading before the traditional two-year holding period, enhancing the liquidity of the investment.

Question 29

Which of the following laws is not associated with financial reform legislation in the wake of the Great Depression?

A) Securities Act
B) Securities Exchange Act
C) Glass-Steagall Act
D) Financial Services Modernization Act

Question 30

Which of the following is not true about private placement?

A) The sale of securities directly to the ultimate investor and not through a public offering.
B) The underwriting function cannot be avoided.
C) A fee is earned for the origination/selling or uniting the supplier and user of funds.
D) A private placement may reduce the total flotation costs for a business.
E) It is used by both lesser-known firms and large, well-known firms in need of funds.

Question 31

Early investment banks, unlike commercial banks with limited "money-related" services and loans, could perform many financial services and were known as

A) private banks.
B) universal banks.
C) Jay Cooke banks.
D) industrial banks
E) money banks

Question 32

Investment Banks provide services for the direct financing in markets such as collecting deposits and making business loans.

Question 33

In an underwritten offer, the risk of selling the issue at a price lower than that promised to the issuer is borne by the investment bank.

Question 34

Financial Services Modernization Act of 1999 is to limit investment banks to engage any commercial banking activities.

Question 35

Even before the Financial Services Modernization Act was passed, commercial banks could

A) invest in common equities
B) underwrite U.S. government securities
C) underwrite corporate bond issues.
D) purchase any debt securities for their own account.
E) both b and c

Question 36

In 2008, Lehman Brothers filed bankruptcy and many investment banks receive the bailout funds from the Treasury. This means there is very limited career opportunities in investment banking.

Question 37

Universal banks are financial institutions that are allowed to do only commercial banking activities.

Question 38

In an underwritten offer, the investment bank is compensated based on the number of securities sold.

Question 39

_______ involves an issuer of securities soliciting offers from several investment bankers.

A) negotiated offering
B) underwritten offer
C) preliminary search
D) competitive bidding
E) initial underpricing

Question 40

The adoption of SEC Rule 144A provided private placement borrowers

A) higher costs of financing because of increased regulation.
B) lower-cost financing because of the reduction in default risk provided by the regulation.
C) lower-cost financing because private placement investors can now trade private placement securities instead of holding them for a two-year period.
D) the right not to register their issues with SEC.

Question 41

Investment bankers tend to reduce their risk of underwriting by

A) using futures contracts to hedge their price risk.
B) underpricing a new issue.
C) reducing the size of the selling group in the underwriting.
D) reducing the number of investment banking firms in the underwriting syndicate.

Question 42

In an underwritten offer, the risk is borne by

A) an investment banker
B) an issuer
C) investors
D) a selling group
E) a dealer

Question 43

In an underwritten IPO, investment banks in the underwriting syndicate can sell shares

A) to institutional investors such as mutual funds
B) to retail investors
C) back to the issuer
D) both a and b

Question 44

The best example of an investment banker's effort to manage the inventory risk in a new security issue is

A) the formation of a selling group.
B) the formation of an underwriting syndicate.
C) allotting shares of the issue to participating brokers.
D) paying a high price to the issuing firm.

Question 45

Which of the following is NOT a source of funds for security brokers and dealers?

A) customer credit balances
B) federal funds sold
C) repurchase agreements
D) call loans from banks
E) All of the above are sources of funds for security brokers and dealers.

Question 46

A(n) _________ is a "market-maker" in securities and trades on a bid/ask basis.

A) broker
B) arbitrager
C) dealer
D) investment banker

Question 47

The optimum offering price of an underwritten security is called the market equilibrium price, which is

A) the highest price offered to the issuing firm.
B) the lowest price paid by the investment banker.
C) the highest price which allows the entire issue to be sold quickly at the offering price.
D) the price that will maximize the amount obtained by the investment banker.

Question 48

Which of the following activities is not performed around the time of new debt security issue?

A) securing a credit rating from a rating service provider.
B) obtaining the security certificates printed by the Federal Reserve Banks.
C) selecting a transfer agent.
D) selecting a trustee.

Question 49

The preliminary and final prospectus provided to prospective investors in a new security issue is a summary of the

A) registration statement filed with Federal Reserve.
B) public announcement of price and number of securities issued by the SEC.
C) registration statement filed with the SEC.
D) duties of the investment banker in the primary offering.

Question 50

Universal banks were/are:

A) commercial banks operating in the U.S. prior to 1980.
B) financial institutions outside of the U.S. that can engage in deposit taking, making loans, brokerage activities, securities underwriting, and offering insurance services.
C) investment banks operating in the U.S. prior to 1980.
D) commercial banks that can also sell universal life insurance policies.
E) none of the above.

Question 51

All but one of the following are merger-related services provided by investment bankers to acquiring firms:

A) Investment advice to target companies.
B) Identify merger target companies for the acquirer.
C) Analysis and pricing of the deal.
D) Merger negotiation assistance.

Question 52

The major source of funds for brokers and dealers is

A) customer accounts balances.
B) call loans from commercial banks.
C) their net worth.
D) loans from the SEC.

Question 53

When an investment banker holds a security inventory to make market in a security it has just underwritten, it is performing the ________ function in the market.

A) registration
B) dealer
C) broker
D) advisory

Question 54

Which of the following is true about a best-efforts offering?

A) The investment bank is compensated based on the number of securities sold.
B) The risk of the securities not selling or not selling at a desired price is borne by the issuing firm, not the investment bank.
C) Typically, the smaller and more risky issuers are forced to use this type of offering.
D) All of the above is true.

Question 55

A venture capitalist provides seed financing

A) at the "idea" stage of a new business
B) at the product development stage.
C) at the time of the IPO.
D) in the year prior to the public offering.

Question 56

It is called an underwritten offer if

A) the risk of selling the issue at a price higher than that promised to the issuer is borne by the investment bank.
B) the difference between the price at which the issue is sold and that promised to the issuer represents the underwriting spread or the profit earned by the investment bank.
C) the investment bank guarantees the issuing firm a certain price.
D) both a and b
E) all of the above

Question 57

Venture capital investments are characterized by all of the following except

A) Substantial control over management decisions
B) Low-risk investments with low returns
C) A share of capital appreciation
D) Serves as intermediate financing between founders' capital and the IPO

Question 58

The Federal Reserve System has authority over what area of securities trading?

A) margin trading
B) insider trading
C) exchange market trading
D) registration of the issue

Question 59

If a company has never offered securities to the public, the investment banking will offer the securities in the primary market as

A) a seasoned offering.
B) a rights offering.
C) an IPO.
D) a private placement
E) a best efforts offering.

Question 60

Which of the following is not a service provided by full-service brokerage firms?

A) execution of trades
B) storage of securities
C) making a market in the customers' securities
D) margin credit to customers
E) investment advice

Question 61

YR Megan Chaze, an investment banker, agrees to a firm commitment offering of 1.2 million shares of Formosan Tech stock. The offer price is set at $25.50 and the spread is 30 cents per share. If there are no other fees or expenses, the stock is actually sold to the public at $26.00. What is the amount of funds Formosan Tech receives?

Question 62

Name and discuss the important procedures involved in bringing a new security issue to market by an investment banking firm.

Question 63

Venture capital firms provide _______ financing to be used for product development and initial marketing and _______ financing to initiate manufacturing and sales.

A) start-up; first-stage
B) seed; start-up
C) seed; first-stage
D) first-stage; start-up
E) first-stage; second-stage

Question 64

How might SEC Rule 144A enhance the liquidity and lower the financing costs in private placements?

Question 65

Mezzanine or bridge financing is provided by a venture capital firm to finance

A) seasonal inventory needs.
B) long-term capital needs.
C) before the IPO.
D) research and development.

Question 66

Explain the differences between underwritten offers and best-effort arrangements for IPOs.

Question 67

Venture capitalists provide a unique service to developing businesses. Discuss their services and the organizational structures used by venture capital firms.

Question 68

What are the major services of a full-service investment banking/brokerage firm? What does each provide for financial investors and funds-seeking firms and governments?

Question 69

Which of the following is not a form of a venture capital firm?

A) a private fund
B) a corporate subsidiary
C) a publicly funded small business investment corporation
D) a trust department of a commercial bank

Question 70

Discuss the intense competitive battle between commercial and investment banks for corporate client business. Why have investment banks and commercial banks sought to step into each other's business?