Deck 22: Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Question 1

From an investment banker's perspective, the best outcome occurs when a new issue is ________.

A)undersubscribed
B)fully subscribed
C)oversubscribed
D)syndicated

Answer 1

fully subscribed

Question 2

The primary function of investment banks is to

A)extend credit to stock brokers and dealers.
B)extend credit to investors.
C)extend credit to corporations.
D)help corporations issue new securities.

Answer 2

help corporations issue new securities.

Question 3

The registration statement the securities underwriter files with the SEC contains information about

A)the firm's financial condition, management, competition, industry, and experience.
B)how the funds will be used.
C)management's assessment of the risk of the securities.
D)all of the above.
E)only A and B of the above.

Answer 3

all of the above.

Question 4

Investment banks sell ________ securities to the public, and brokerage firms sell ________ securities to the public.

A)new; existing
B)new and existing; existing
C)existing; new
D)existing; new and existing

Question 5

The primary function of investment banks is

A)the bundling of deposits into loans.
B)extending long-term credit to other financial institutions.
C)helping corporations raise funds.
D)providing credit to firms engaged in international trade.

Question 6

Investment banks may lose ________ if new securities issues are ________.

A)large amounts of money; oversubscribed
B)large amounts of money; fully subscribed
C)future business; oversubscribed
D)future business; undersubscribed

Question 7

The process of underwriting a stock or bond issue requires that the investment bank

A)assure investors that the issue will provide them a high return.
B)purchase the entire issue at a predetermined price if the quantity demanded by consumers is insufficient at the predetermined price.
C)purchase the entire issue at a predetermined price and then resell it in the market.
D)do both A and B of the above.

Question 8

Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called ________.

A)secondary issues
B)seasoned issues
C)outstanding issues
D)experienced issues

Question 9

Often investment bankers will form a group, each one buying only a portion of the new securities to be issued. Such a group is called an underwriting ________.

A)alliance
B)syndicate
C)association
D)guild

Question 10

The largest U.S. underwriter of global debt and equity issues, as of 2009, was ________.

A)Merrill Lynch
B)J)P. Morgan
C)Morgan Stanley
D)Goldman Sachs

Question 11

Under best efforts underwriting, the underwriter

A)pays for the entire security issue.
B)sells the security on a commission basis.
C)spreads the risk among different brokerage houses.
D)makes a special appeal to the Securities and Exchange Commission to delay the issue.

Question 12

SEC registration is

A)required for all securities.
B)required if less than $1.5 million in securities are issued per year.
C)not required for securities that are sold through a private placement.
D)required if the securities mature in less than one year.
E)not required if securities are underwritten by a reputable investment bank.

Question 13

In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis.

A)best efforts
B)brokered
C)private-placement
D)jump-start

Question 14

Tasks that investment bankers perform when acting as underwriters to sell securities to the public include:

A)pricing the security.
B)preparing the filings required by the Securities and Exchange Commission.
C)arranging for the security to be rated.
D)all of the above.
E)only A and B of the above.

Question 15

Most investment banks are attached to

A)large commercial banks.
B)large brokerage houses.
C)finance companies.
D)large nonfinancial corporations.

Question 16

The Glass-Steagall Act

A)separated commercial and investment banking.
B)made it illegal for a commercial bank to buy or sell securities on behalf of its customers.
C)made it illegal for investment banks to engage in the underwriting of corporate securities.
D)did all of the above.
E)did only A and B of the above.

Question 17

Which is not an activity of investment banks?

A)underwriting new issues of corporate stocks and bonds
B)acting as deal makers in mergers
C)acting as intermediaries in the buying and selling of businesses or parts of businesses
D)underwriting new issues of federal government bonds

Question 18

By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a ________.

A)prospectus
B)proxy statement
C)fiduciary warrant
D)debenture

Question 19

An investment bank is a financial institution that

A)bundles small deposits into larger loans.
B)helps corporations raise funds.
C)holds most of its assets in commercial paper.
D)does all of the above.
E)does only A and B of the above.

Question 20

Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a ________.

A)tombstone
B)marker
C)prospectus
D)registration statement

Question 21

In a primary market, ________ sell new issues of securities; in a secondary market, ________ assist in trading previously issued securities.

A)securities dealers; securities brokers
B)securities brokers; securities dealers
C)investment banks; securities brokers and dealers
D)securities brokers and dealers; investment banks

Question 22

By making a market in thinly traded stocks, securities dealers solve the ________ trading problem, which is of particular benefit to ________ businesses.

A)synchronous; large
B)synchronous; small
C)nonsynchronous; large
D)nonsynchronous; small

Question 23

Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division?

A)preparation of a confidential memorandum
B)negotiation of a letter of intent
C)preparation of a definitive agreement
D)forming a syndicate of purchasers

Question 24

Which of the following is not a service securities brokers offer their clients?

A)holding customers' stock for safekeeping
B)providing insurance against loss of the securities
C)providing insurance against loss of value of the securities
D)extending margin credit

Question 25

Private placements

A)do not require the services of investment bankers.
B)need not be registered with the SEC.
C)are more common in the sale of stocks than for bonds.
D)all of the above.
E)are only A and B of the above.

Question 26

________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market.

A)Investment banks; securities brokers and dealers
B)Securities brokers and dealers; investment banks
C)Securities brokers; securities dealers
D)Securities dealers; securities brokers

Question 27

An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a ________.

A)short sell
B)market order
C)limit order
D)stop loss order

Question 28

Securities dealers

A)sell securities out of their inventories to customers who want to buy.
B)buy securities, which they add to their inventories, from customers who want to sell.
C)are largely responsible for the health and growth of small businesses in the United States.
D)do all of the above.
E)do only A and B of the above.

Question 29

The buyers of private placement securities are most likely to be ________.

A)insurance companies
B)pension funds and mutual funds
C)commercial banks
D)all of the above
E)only A and B of the above

Question 30

An instruction to a securities agent to sell a stock when it reaches a specific price is a ________.

A)short sell
B)market order
C)limit order
D)stop loss order

Question 31

Which of the following statements about private placements are true?

A)Private placements are more common for the sale of bonds than for stocks.
B)Investment bankers, though not required for a private placement, often facilitate the transaction.
C)Investment bankers help the issuing firm file the paperwork required by the SEC.
D)All of the above are true.
E)Only A and B of the above are true.

Question 32

The best known investment banker involved in mergers and acquisitions, credited with inventing the junk bond market, is ________.

A)Ivan Boesky
B)Michael Milken
C)James Garner
D)Michael Douglas

Question 33

To take advantage of anticipated stock price decreases, an investor would use ________.

A)a market order
B)a limit order
C)a short sell
D)margin credit

Question 34

Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included

A)helping firms that want to acquire another firm locate a firm to pursue.
B)helping would-be acquirers solicit shareholders through a tender offer.
C)helping target firms ward off undesired takeover attempts.
D)all of the above.
E)only A and B of the above.

Question 35

The buyers of private placement issues are most likely to be ________.

A)insurance companies
B)pension funds
C)investment banks
D)all of the above
E)only A and B of the above

Question 36

Securities dealers

A)hold inventories of securities, which they sell to customers who want to buy.
B)hold securities that they have purchased from customers who wanted to sell.
C)are called market takers, as they have significantly cut into the market that brokers used to dominate.
D)do all of the above.
E)do only A and B of the above.

Question 37

An instruction to a securities agent to buy or sell the security at the current market price is called a ________.

A)limit order
B)market order
C)stop loss order
D)margin order

Question 38

The most active investment banking firm in the private placement market is ________.

A)Merrill Lynch
B)Lehman Brothers
C)Goldman Sachs
D)Morgan Stanley

Question 39

Which of the following best explains the difference between brokers and dealers?

A)Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices.
B)Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices.
C)Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities.
D)There is no difference between brokers and dealers.

Question 40

Which of the following statements about cash management accounts (CMAs)are true?

A)The cash management account was developed in 1977 by Merrill Lynch.
B)The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities.
C)As a result of CMAs, the distinction between banking activities and the activities of nonbank financial institutions has become more clearly defined.
D)All of the above are true.
E)Only A and B of the above are true.

Question 41

With private investing,

A)capital is raised by selling securities to the public.
B)capital is raised by issuing new shares of stock.
C)a limited partnership is formed that raises money from a small number of high-wealth investors.
D)all of the above occur

Question 42

A full-service broker offers its clients all of the following except

A)execution of trades on request.
B)low transaction fees.
C)research and investment advice.
D)development of long-term customer relationships.

Question 43

Venture capital firms are usually organized as ________.

A)closed-end mutual funds
B)limited partnerships
C)corporations
D)nonprofit businesses

Question 44

Which of the following is a characteristic feature of venture capital firms?

A)developing a portfolio of companies
B)holding debt in the firms that are funded
C)allowing firms to use the funds as they see fit
D)having a short-term investment horizon

Question 45

The largest full-service broker is ________.

A)Bank of America Merrill Lynch
B)Charles Schwab Corp.
C)Ameritrade
D)Smith Barney

Question 46

When taking a particular course of action for a private equity firm, the CEO of a privately held company needs to convince ________ that it is a good decision.

A)the shareholders
B)the managing partners
C)no one
D)both A and B

Question 47

The 20-year average return of venture capital firms has been about ________.

A)50%
B)8%
C)20%
D)100%

Question 48

The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers.

Question 49

Which of the following is not a characteristic feature of venture capital firms?

A)funding just one or a small number of firms
B)holding equity in the firms that are funded
C)having a long-term investment horizon
D)providing advice and assistance to the firms that are funded

Question 50

An investment pool is formed to

A)manipulate the market by spreading false rumors.
B)lower brokerage fees by combining security purchases.
C)share investment advice among member investors.
D)take advantage of tax breaks introduced by the 1933 and 1934 securities acts.

Question 51

Which of the following is an advantage to a private equity buyout?

A)They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act.
B)The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies.
C)both A and B.
D)neither A nor B.

Question 52

Which of the following statements about venture capital funding is not correct?

A)Exiting an investment can occur through an initial public offering or by merger or acquisition.
B)Venture capital investing is highly risky.
C)Venture capital firms may focus on a limited geographic area or on specific industries to facilitate monitoring their investments.
D)Firms hope to exit a start-up firm in 3-5 years.

Question 53

A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund.

A)large; small
B)small; large
C)large; large
D)small; small

Question 54

The ________ of the volume handled by brokers and dealers is in the publicly held securities.

A)vast majority
B)low percentage
C)total amount
D)none of the above

Question 55

Which of the following is a description of a private equity firm?

A)Public shares are retired.
B)A public company goes private.
C)The firm is no longer subject to controls and oversight required of publicly held companies.
D)All of the above are correct.

Question 56

A ________ is a specialized firm that finances young, start-up companies.

A)venture capital firm
B)finance company
C)small-business finance company
D)capital-creation company

Question 57

The sources of venture capital funding have

A)shifted from wealthy individuals to pension funds and corporations.
B)shifted from pension funds and corporations to wealthy individuals.
C)decreased since 1990.
D)done none of the above.

Question 58

There are ________ risk and ________ returns to investors in private equity buyouts.

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

Question 59

Since the stock market decline in 2000, the number of companies funded and the total funds invested by venture capital firms have ________.

A)held steady
B)declined
C)increased slightly
D)increased sharply

Question 60

Which of the following provides funds to companies not yet ready to sell securities to the public?

A)investment banks
B)securities brokers and dealers
C)venture capital firms
D)none of the above

Question 61

An investment pool is formed to manipulate the market for a stock by spreading false rumors about the health of the firm.

Question 62

What is underwriting?

Question 63

The Securities Acts Amendment of 1975 abolished fixed commissions.

Question 64

Explain why private placements of securities are an attractive way of raising funds for some firms.

Question 65

Explain how rulings by the courts and regulators have made the markets served by both commercial and investment banks more competitive.

Question 66

What services do investment bankers provide for firms that are issuing new securities?

Question 67

How do best efforts agreements and private placements differ from the usual process of underwriting new securities issues?

Question 68

When a firm issues stock for the first time in an initial public offering, it is difficult for an investment bank to determine what the correct price should be.

Question 69

Private placements are more common for the sale of stocks than for bonds.

Question 70

An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest among their customers to sell all the securities by the issue date.

Question 71

An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income.

Question 72

Investment bankers perform a number of tasks required to sell securities to the public, among them pricing the security, preparing the filings required by the SEC, arranging for the security to be rated, and marketing the security through their contacts with brokerage houses.

Question 73

In a typical private equity buyout, a partnership is formed and private equity investors are contacted to pledge participation.

Question 74

Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured.

Question 75

Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts.

Question 76

One disadvantage of the private placement of securities issues is the high cost of registering the issue.

Question 77

Investors in venture capital firms expect to profit quickly from their investment.

Question 78

Resisted takeovers are called hostile.

Question 79

Investment banks form syndicates to reduce the risk involved in selling new securities.

Question 80

Junk bonds are high-risk, high-return equity securities that were used primarily to finance takeover attempts.