Deck 24: Securities Operations

Question 1

The ____ can liquidate failing brokerage firms.

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

Answer 1

D

Question 2

In a ____, a 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

Answer 2

D

Question 3

____ is motivated by the perception that the sum of the parts is sometimes greater than the whole.

A)Bridging
B)Asset stripping
C)Greenmail
D)None of the above

Answer 3

B

Question 4

Which of the following statements is incorrect?

A)A private bond placement avoids the underwriting fee.
B)Private placements of stocks are more common than private placements of bonds.
C)The provisions of a privately placed bond issue can be tailored to the desires of the purchaser.
D)A possible disadvantage of a private placement is that the demand may not be as strong as for a publicly placed issue.

Question 5

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)B or C, depending on the amount of stock to be issued

Question 6

Competitive bidding by securities firms for underwriting the issue of new bonds is primarily used for

A)federal government bonds.
B)bonds issued by banks.
C)public utility bonds.
D)bonds issued by non-banking financial institution.

Question 7

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 8

A(n) ____ discloses relevant financial data on a firm issuing securities, and the provisions applicable to the security.

A)SEC preferred disclosure form
B)1040 disclosure form
C)shelf-registration
D)prospectus

Question 9

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

A)intermediary.
B)lender (creditor).
C)investor.
D)B and C

Question 10

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

A)setting regulatory rules for stock exchanges
B)origination
C)underwriting
D)distribution

Question 11

Securities firms facilitate IPOs in the ____ market; they facilitate the trades of stocks between investors in the ____ market.

A)primary; primary
B)secondary; primary
C)primary; secondary
D)secondary; secondary

Question 12

All information relevant to the security, as well as the agreement between the issuer and the securities firm, must be provided in the

A)origination.
B)registration statement.
C)best-efforts agreement.
D)none of the above

Question 13

Which of the following is not a major function of the securities industry?

A)brokerage
B)raising new capital
C)underwriting
D)decisions regarding open market operations

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)A and C

Question 15

The ____ determines margin requirements on securities purchased.

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

Question 16

The underwriting spread on newly issued bonds is normally ____ that on newly issued stock.

A)less than
B)greater than
C)about the same as
D)less than (for newly issued preferred stock) but greater than (for newly issued common stock)

Question 17

Research indicates that securities firms tend to

A)overprice IPOs.
B)underprice IPOs.
C)price IPOs correctly.
D)none of the above

Question 18

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 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

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 21

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

A)Origination
B)Underwriting
C)Distribution
D)Advising
E)All of the above are services securities firms provide in placing bonds

Question 22

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 23

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

Question 24

____ is (are) not included in flotation costs.

A)Issue costs
B)Underwriting spread
C)Taxes paid on income earned from the proceeds through the securities firm
D)Registration expenses

Question 25

Which of the following is not an SEC rule?

A)Analysts of securities firms underwriting an IPO cannot promote new 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 securities department within the securities firm.
D)An analyst's rating must divulge any recent securities business provided by the securities firm that assigned the rating.

Question 26

Asset-stripping refers to

A)acquiring shares in a firm, causing the firm to repurchase the shares at a premium to prevent a takeover.
B)financing provided by securities firms to help support an acquisition.
C)investing in the shares of a firm that is anticipated to experience a leveraged buyout (LBO).
D)acquiring a firm and selling off individual divisions of the firm separately.

Question 27

Securities firms serve as an intermediary for each of the following, except

A)stock offerings.
B)debt offerings.
C)IPOs.
D)they serve as intermediary for all of the above.

Question 28

One of the main functions of securities firms is raising capital for corporations.

Question 29

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

Question 30

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 31

When a securities firm provides a bridge loan, it would most likely be

A)to a corporation until the corporation raises funds in other ways.
B)to a commercial bank in the federal funds market.
C)to a mutual fund that needs cover share redemptions.
D)to an investor who needs to cover his margin from buying stock.

Question 32

Funds received from a bridge loan are commonly used to

A)purchase junk bonds.
B)purchase high-grade corporate bonds.
C)provide temporary financing for an acquisition.
D)provide financing for individual investors that wish to purchase Treasury bonds.

Question 33

Unlike the standardized provisions of a publicly placed issue, the provisions of a privately placed issue can be tailored to the desires of the purchaser.

Question 34

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

Question 35

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

A)Deposit Insurance Fund
B)National Association of Securities Dealers
C)Securities and Exchange Commission
D)Federal Reserve Board
E)All of the above are involved in the regulation of the securities industry.

Question 36

Securities firms commonly engage in all of the following functions except

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

Question 37

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

A)positively
B)not
C)inversely
D)A or B

Question 38

When the stock market is depressed, stock transactions tend to decline, causing a reduction in business for securities firms. This is an example of ____ risk.

A)interest rate
B)credit
C)market
D)exchange rate

Question 39

Securities firms commonly perform all of the following functions except for _____ when facilitating a secondary stock offering.

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

Question 40

As a result of a spinoff, the ownership of a firm's is separated into two parts with separate ownership.

Question 41

The compensation paid to securities firms for raising funds is typically in the form of interest income.

Question 42

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 43

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 spin-off of a unit
C)a carve-out
D)divestiture

Question 44

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

Question 45

Securities and Exchange Commission (SEC) approval of a registration statement guarantees the quality and safety of the securities to be issued.

Question 46

Employees of a securities firm are less likely to engage in unethical behavior when the firm rewards employees with higher compensation based on:

A)the number of transactions that employees execute for clients.
B)clients' assessments of the employees' services.
C)the amount of specific securities from the firm's holdings that employees sell to clients.
D)the number of transactions that the employees promote to clients in which the firm is the counterparty.

Question 47

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.

Question 48

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

Question 49

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

Question 50

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

Question 51

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 the above

Question 52

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

Question 53

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

A)National Association of Securities Dealers
B)Resolution Trust Corporation
C)New York Stock Exchange
D)Federal Reserve

Question 54

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 55

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 56

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

Question 57

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

Question 58

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

Question 59

The process of obtaining mortgages from the financial institutions that originated them, bundling the mortgages into tranches based on their risk level, and selling the tranches to institutional investors is called:

A)mortgage stripping.
B)mortgage underwriting.
C)securitization.
D)intermediation.