Deck 6: Investment Banking Firms

Question 1

Investment banking firms are highly leveraged companies which means that:

A) Equity is greater than the amount of borrowed funds.
B) The amount of borrowed funds relative to the amount of equity is high.
C) They heavily borrow on a short-term basis.
D) They are very risky.
E) None of the above.

Answer 1

The amount of borrowed funds relative to the amount of equity is high.

Question 2

The revenues generated by investment banking firms come from:

A) Commissions.
B) Fee income.
C) Spread income.
D) b and c only.
E) All of the above.

Answer 2

All of the above.

Question 3

The traditional process in the U.S. for issuing new securities involves investment bankers, which perform which of the following functions?

A) Advising the issuer on the terms and timing of the offering.
B) Buying the securities from the issuer.
C) Distributing the issue to the public.
D) All of the above.
E) None of the above.

Answer 3

All of the above.

Question 4

When an investment banking firm buys the securities from the issuer and accepts the risk of selling the securities to investors at a lower price, the arrangement is referred to as:

A) Underwriting.
B) Firm commitment.
C) Best-efforts underwriting.
D) Underwriting syndicate.
E) None of the above.

Question 5

The difference between the price paid to the issuer and the price at which the investment bank reoffers the security to the public is called:

A) Bid-ask spread.
B) Gross spread.
C) Underwriter discount.
D) b and c only.
E) None of the above.

Question 6

An investment banking firm will typically put together a group of firms in order to:

A) Reduce the risk of capital loss.
B) Reduce the risk of default.
C) Increase the revenues generated from the underwriting process.
D) Reduce the risk of pricing the issue.
E) None of the above.

Question 7

In a firm commitment underwriting arrangement, the risk that the investment banking firm accepts is:

A) That it sells the securities to investors at a lower price.
B) That the price it pays to purchase the securities from the issuer will be less than the price it receives when it reoffers the securities to the public.
C) That it does not buy the entire issue from the issuer.
D) That it does not realize the gross spread.
E) None of the above.

Question 8

When an investment banker puts together a selling group, the gross spread is divided among:

A) The lead underwriter.
B) Members of the underwriting syndicate.
C) Members of the selling group.
D) B and c only.
E) All of the above.

Question 9

Whenever investment bankers assist in offering the securities of government-owned companies to private investors, this process is referred to as:

A) Initial public offering.
B) Privatization.
C) Underwriting.
D) Firm commitment.
E) None of the above.

Question 10

To protect against a loss, investment banks engage in:

A) Speculative strategies.
B) Active portfolio management strategies.
C) Hedging strategies.
D) Passive portfolio management strategies.
E) None of the above.

Question 11

Traders employ strategies to generate revenues from positions in one or more securities including:

A) Speculation.
B) Riskless arbitrage.
C) Risk arbitrage.
D) Hedging.
E) a, b and c only.

Question 12

When a trader positions the capital of the investment banking firm to take advantage of a specific anticipated movement of prices or a spread between two prices, this strategy is referred to as:

A) Riskless arbitrage.
B) Risk arbitrage.
C) Speculation.
D) Hedging.
E) None of the above.

Question 13

Risk arbitrage to lock in a spread, if the exchange is consummated on the announced terms, involves:

A) Buying the shares of the target company and shorting the shares of the bidding company.
B) Buying the shares of the target company and buying an equal number of shares of the bidding company.
C) Buying the shares of the target company and selling short an equal number of shares of the acquiring firm.
D) a and c only.
E) All of the above.

Question 14

Private placement of securities involves:

A) Selling securities to the public.
B) Selling securities to a limited number of individual investors.
C) Placing securities with a limited number of institutional investors.
D) Selling securities that have a pool of assets as collateral.
E) None of the above.

Question 15

A firm, which is acquired using mostly debt funds and taken private, is participating in a(n):

A) Initial public offering.
B) Leveraged buyout.
C) Private placement.
D) Merchant banking.
E) None of the above.

Question 16

When an investment banking firm commits its own funds by either taking an equity interest or creditor position in companies, this activity is referred to as:

A) Merchant banking.
B) Leveraged buyout.
C) Initial public offering.
D) Private placement.
E) None of the above.

Question 17

Dealer-created derivative instruments protect investment banking firms against:

A) Capital loss.
B) Adverse price movements.
C) Increases in interest rates.
D) All of the above.
E) None of the above.

Question 18

When an investment banker works with a corporation to issue an asset-backed security it generates revenue from the:

A) Spread income
B) Bid-ask spread.
C) Gross spread.
D) Underwriter discount.
E) None of the above.

Question 19

Investment banking activities are performed by:

A) Commercial banks.
B) Securities firms.
C) Government agencies.
D) a and b only.
E) All of the above.

Question 20

Investment banking firms are engaged in which of the following activities?

A) Public offering and trading of securities.
B) Private placement of securities.
C) Securitization of assets.
D) Mergers and acquisitions.
E) All of the above.

Question 21

Investment bankers act as brokers and dealers in the buying and selling of securities.

Question 22

When the investment banking firm agrees to buy the securities from the issuer at a set price, the underwriting arrangement is referred to as underwriting.

Question 23

Riskless arbitrage calls for a trader to find a security or package of securities trading at different prices.

Question 24

Investment banking firms have created subsidiaries that manage funds for either individual or institutional investors.

Question 25

Explain the differences and similarities between riskless arbitrage and risk arbitrage. How does it differ from speculation?

Question 26

Discuss the various roles investment banking firms play in mergers and acquisitions.