Deck 24: Securities Operations

Question 1

The ____ determines margin requirements on securities purchased.

A)Securities and Exchange Commission
B)Financial Industry Regulatory Authority
C)Federal Reserve Board
D)Securities Investor Protection Corporation

Answer 1

C

Question 2

When securities firms help corporations issue bonds, their primary role is as a(n)

A)intermediary.
B)lender (creditor).
C)investor.
D)lendor (creditor)AND investor.

Answer 2

A

Question 3

The ____ can liquidate failing brokerage firms.

A)Securities and Exchange Commission
B)Financial Industry Regulatory Authority
C)Federal Reserve Board
D)Securities Investor Protection Corporation

Answer 3

D

Question 4

When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the securities firm, must be included in the ___________ that is submitted to the Securities and Exchange Commission.

A)origination
B)registration statement
C)best-efforts agreement
D)None of these are correct.

Question 5

Research indicates that securities firms tend to

A)overprice IPOs.
B)underprice IPOs.
C)price IPOs correctly.
D)None of these are correct.

Question 6

The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____.

A)high; high
B)high; low
C)low; high
D)low; low

Question 7

The ____ is NOT involved in the regulation of the securities industry.

A)Deposit Insurance Fund
B)Financial Industry Regulatory Authority
C)Securities and Exchange Commission
D)Federal Reserve Board
E)All of these are involved in the regulation of the securities industry.

Question 8

____ is NOT a service that a securities firm provides in placing bonds.

A)Divestiture
B)Underwriting
C)Distribution
D)Advising
E)All of these are services that securities firms provide in placing bonds

Question 9

In a ____ of stock, all of the shares issued may be held by a small number of institutional investors.

A)market placement
B)public placement
C)shelf placement
D)private placement

Question 10

Which of the following is  NOT a service that is commonly performed by a securities firm?

A)setting regulatory rules for stock exchanges
B)origination
C)underwriting
D)distribution of stock or bond offerings

Question 11

The ____ regulates the issuance of securities.

A)Securities and Exchange Commission
B)National Association of Securities Dealers
C)Federal Reserve Board
D)Securities Investor Protection Corporation

Question 12

The value of a securities firm is typically ____ related to interest rate movements.

A)Positively
B)Not
C)Inversely
D)either  Positively or Inversely , depending on the direction of the interest rate movements.

Question 13

When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to the issuing corporation.

Question 14

Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.

A)lower; small
B)lower; large
C)higher; large
D)lower; small AND higher; large

Question 15

When a firm spins off a unit, it creates new shares of stock representing the unit and distributes them to its existing shareholders.

Question 16

Which of the following is NOT an SEC rule?

A)Analysts at a securities firm underwriting an IPO cannot promote the stock for the first 40 days after the IPO.
B)An analyst's compensation should be directly aligned with the amount of business that the analyst brings to the securities firm.
C)Analysts cannot be supervised by the investment banking department within the securities firm.
D)When rating a security, an analyst must divulge any recent investment banking business provided by the analyst's securities firm to the firm that issued the security.

Question 17

The price of newly issued stock should be ____ the market price of the firm's outstanding stock.

A)about the same as
B)much more than
C)much less than
D)either much more than or much less than, depending on the amount of stock issued

Question 18

After a target firm is acquired, the acquirer may sell off divisions of the target that are not compatible with the acquirer's business. This process is known as

A)bridging.
B)asset stripping.
C)greenmail.
D)None of these are correct.

Question 19

Under SEC Rule 144A, firms may engage in private placements of stock without filing the extensive registration statement that is required for public placements.

Question 20

The ________ places limits on proprietary trading by commercial banks and securities firms that have become bank holding companies.

A)Bernanke Rule
B)Financial Safety Rule
C)Volcker Rule
D)Securities Reform Act

Question 21

Securities firms serve as intermediaries for all of the following, EXCEPT

A)stock offerings.
B)bond offerings.
C)IPOs.
D)Securities firms serve as intermediaries for all of the  these.

Question 22

Securities firms engage in proprietary trading, which means that they serve as an intermediary by trading shares of stock requested by proprietorships.

Question 23

The ____ offers insurance on cash and securities deposited at brokerage firms.

A)Federal Reserve
B)New York Stock Exchange
C)Securities Investor Protection Corporation (SIPC)
D)Securities and Exchange Commission (SEC)

Question 24

During the credit crisis, many commercial banks were forced to convert to securities firms.

Question 25

Which of the following is NOT a function that a securities firm commonly performs when facilitating a secondary stock offering?

A)origination
B)underwriting the stock
C)distribution of the stock
D)purchasing at least 20 percent of the offering

Question 26

The Securities and Exchange Commission's approval of a registration statement guarantees the quality and safety of the securities to be issued.

Question 27

When a securities firm increases its financial leverage, the firm reduces both its potential return on equity (ROE)and its risk.

Question 28

Securities firms commonly engage in all of the following EXCEPT

A)proprietary trading.
B)underwriting stock.
C)operating mutual funds.
D)providing brokerage services.
E)operating credit unions.

Question 29

One reason for the financial problems of securities firms during the credit crisis was that they used a high degree of financial leverage.

Question 30

One of the main functions of securities firms is helping corporations and governments raise funds.

Question 31

The Financial Reform Act created the Financial Stability Oversight Council, which is responsible for identifying risks to financial stability in the United States.

Question 32

Asset stripping refers to

A)acquiring shares in a firm and then causing the firm to repurchase the shares at a premium to prevent a takeover.
B)financing provided by a securities firm to help support an acquisition.
C)investing in the shares of a firm that is expected to experience a leveraged buyout (LBO).
D)selling off individual divisions of an acquired firm that are not compatible with the acquirer's business.

Question 33

As a result of the Financial Services Modernization Act

A)securities firms had to search for loopholes to expand into other types of financial services.
B)firms that formed a special finance holding company were regulated by the SEC.
C)banking, securities activities, and insurance services could be consolidated in a single financial institution.
D)securities firms were prohibited from expanding into other types of financial services.

Question 34

A bridge loan provided by a securities firm would most likely be made to

A)an acquirer that needs temporary financing to complete a merger.
B)a commercial bank in the federal funds market.
C)a mutual fund that needs to cover share redemptions.
D)an institutional investor that has received a margin call and needs to add cash to its margin account.

Question 35

The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income.

Question 36

Institutional investors that are willing to hold stock for only a very short period of time are prime candidates for participating in a private placement.

Question 37

During the credit crisis, some large securities firms were either acquired by commercial banks or converted into bank holding companies.

Question 38

____ are NOT included in flotation costs.

A)Issue costs
B)Fees paid to the underwriters
C)Taxes paid on income earned from the stock offering
D)Registration expenses

Question 39

Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.

Question 40

When securities firms facilitate initial public offerings (IPOs), they attempt to price the stock high enough to satisfy the issuing firm.

Question 41

Which of the following is NOT a way that a securities firm might advise a corporation to restructure its operations?

A)a stock pass-through
B)a spinoff of a unit
C)a carve-out
D)a divestiture

Question 42

The Federal Reserve intervened to help securities firms during the credit crisis in order to reduce the potential adverse effects of systemic risk.

Question 43

When securities firms facilitate an IPO, they attempt to price the stock

A)at a level that will enable institutional investors who invest in the IPO to earn reasonable returns.
B)high enough to satisfy the issuing firm.
C)at a level that will enable the securities firms to place the entire issue.
D)All of these are correct.

Question 44

Securities firms avoided exposure to mortgages during the credit crisis because they sold their mortgage holdings before the crisis began.

Question 45

The SEC's Regulation Fair Disclosure (FD)

A)requires firms to disclose any significant information to the SEC before making public announcements.
B)requires firms to disclose any significant information to the Federal Reserve before releasing it to the public.
C)requires firms to disclose any significant information simultaneously to all market participants.
D)prohibits insiders at firms from trading on significant inside information.

Question 46

Securities firms that converted to bank holding companies during the credit crisis

A)gained more flexibility to obtain financing from the Federal Reserve.
B)had to give up their traditional securities function of underwriting.
C)came under greater regulatory oversight by the Securities Investor Protection Corporation.
D)were prohibited from investing in or selling mortgage-backed securities.

Question 47

Which of the following does NOT play a role in regulating securities trading?

A)Financial Industry Regulatory Authority
B)Resolution Trust Corporation
C)New York Stock Exchange
D)Federal Reserve

Question 48

Many of the fees that securities firms charge for advising clients on a possible merger are typically dependent on whether the merger takes place.

Question 49

Which of the following is NOT an example of a securities firm that experienced financial problems as a result of taking on excessive risk when engaging in proprietary trading?

A)Washington Mutual
B)Société Générale
C)Bear Stearns
D)Barings Bank

Question 50

If securities firms are subject to systemic risk, this means that their main source of risk is a rise in interest rates, which may cause the value of their bond holdings to decline.