Question 1

Sell-side analysts typically work at mutual funds and pension funds.

Accepted Answer

Sell-side analysts typically work for investment banks and provide investment recommendations to their clients, while buy-side analysts typically work at mutual funds and pension funds to make investment decisions on behalf of their clients.

Question 2

The term &#34;Chinese Wall&#34; refers to economic conflict between US and China

Accepted Answer

The term "Chinese Wall" actually refers to a metaphorical barrier that supposedly prevents the communication between different departments of a financial or legal firm to prevent conflicts of interest. It has nothing to do specifically with the economic conflict between the US and China.

Question 3

In the best-efforts method, the investment bank does not guarantee that the firm will get its desired amount of capital.

Accepted Answer

In the best-efforts method, the investment bank only makes its best effort to sell the securities, but there is no guarantee that the firm will receive its desired capital or that all of the securities will sell.

Question 4

Average first-day returns for IPOs have been negative each year since 1980, because investment banks usually sell at a slightly higher price to compensate for risks from underwriting the issues.

Accepted Answer

Average first-day returns for IPOs have been positive in some years since 1980. Additionally, investment banks aim to price the IPOs accurately to generate demand and avoid negative first-day returns.

Question 5

As demand for technology firms dramatically increased in the mid- to late-1990s, investment banks began to bring inferior companies to the market as the risk for underwriting these firms did not seem very high with such strong demand.

Accepted Answer

This statement is true. The high demand for technology firms during this time period led investment banks to underwrite companies that may not have been of high quality.

Question 6

Which one of these is NOT a traditional method of obtaining capital?&#10;A)Issuing stock&#10;B)Issuing bonds&#10;C)Structured Deals&#10;D)Borrowing from banks&#10;E)All of the above are traditional methods of obtaining capital.

Accepted Answer

Structured deals are a relatively newer method of obtaining capital and involve a customized agreement between the company and investors. The more traditional methods of obtaining capital include issuing stock, issuing bonds, and borrowing from banks.

Question 7

In 2003 SEC settlement that resulted in $1.4 billion between Merrill Lynch and nine other firms is referred to as:&#10;A)National Research Settlement&#10;B)Global Analyst Research Settlement&#10;C)Investment Banking Massacre&#10;D)Global Securities Analysts Settlement&#10;E)None of the above.

Accepted Answer

The settlement between Merrill Lynch and nine other firms in 2003 is referred to as the Global Analyst Research Settlement. This settlement was reached as a result of accusations of misleading research reports and conflicts of interest between analysts and investment bankers. The settlement totaled $1.4 billion and aimed to reform the industry's practices.

Question 8

Which of the choices below is a benefit of the Regulation Fair Disclosure rule?&#10;A)It makes analysts jobs easier&#10;B)It creates a level playing field for investors&#10;C)It creates a three-tier rating system to eliminate ambiguity&#10;D)It prevents privileged information from being made public&#10;E)None of the above.

Accepted Answer

The Regulation Fair Disclosure rule requires publicly traded companies to disclose material information to all investors at the same time, rather than giving the information to select analysts or investors first. This creates a level playing field for all investors, who can make investment decisions based on the same information. None of the other choices correctly describe a benefit of the Regulation Fair Disclosure rule.

Question 9

Due to the higher risk for the investment bank, fees for seasoned equity offerings SEO) are usually higher than for initial public offerings IPO).

Accepted Answer

Seasoned Equity Offerings (SEO) typically have lower fees than Initial Public Offerings (IPO) because the company is already publicly traded, reducing the risk and amount of work for the investment bank.

Deck 5: Investment Banks and Securities Analysts