Deck 16: Securities Firms and Investment Banks

Question 1

Cash management accounts offered by a securities firm allow investors to write checks on funds invested in money market securities.

Answer 1

True

Question 2

The process of creating a secondary market for securities or contracts is termed brokerage.

Answer 2

False

Question 3

The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000.

Answer 3

False

Question 4

Brokerage commission income and stock market valuations tend to move inversely in most years,including in 2010.

Question 5

Profitability at investment banking firms has been very stable each year since 2001.

Question 6

Diversified full-line investment banks act as both broker dealers and securities underwriters.

Question 7

A best efforts offering is one in which

A)the underwriter bears the risk of an unsuccessful offering.
B)the bid-ask spread is exceptionally high,but the investment banker does his best to sell the issue anyway.
C)the investment banker acts as a principal for the issuer.
D)the investment banker acts only as a distribution agent.
E)the issue can only be privately placed.

Question 8

A stock broker acts as a principal on behalf of the customer.

Question 9

In a best efforts offering,the investment banker acts as an agent for the issuer rather than as a principal.

Question 10

Diversified full-line securities firms engage in all but which one of the following?

A)Trading and brokerage of existing securities
B)Corporate restructuring and advice
C)Issuing new securities
D)Raising money via insured deposits

Question 11

An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices.

Question 12

Program trading is the simultaneous buying and selling of at least 15 stocks worth a total of $1 million or more.

Question 13

If an underwriter overestimates the demand for a firm's securities in a firm commitment offering,the underwriter can

A)sell the shares back to the issuing firm at a discount.
B)lower the bid price to the issuing firm.
C)increase the fees charged to the issuing firm.
D)cancel the issue and refund the fees paid by the issuing firm.
E)none of the options

Question 14

Angel venture capitalists have invested more in start-up firms than institutional venture capital firms.

Question 15

An example of a national full-line investment banker that specializes in corporate finance is Goldman Sachs.

Question 16

Although an investor can write checks on a cash management account held with a broker,regulations prevent the use of ATMs or debit cards on these accounts.

Question 17

Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

Question 18

A market maker buys IBM at $185 for his own account and sells the stock later in the day at $187. He is acting as a broker in this transaction.

Question 19

For securities firms,income from investment management is more stable than income from underwriting or trading activities.

Question 20

If you buy 100 shares of IBM stock in anticipation that earnings will increase by more than anticipated,you are engaging in what is termed a risky arbitrage.

Question 21

An entrepreneur looking for financing to get her small,personally-owned business up and running should probably consider

A)an IPO.
B)a seasoned stock offering.
C)a public debt offering.
D)a venture capitalist.
E)a syndicated loan.

Question 22

In 2012,the greatest dollar volume of U.S. corporate underwriting occurred for which type of security?

A)Straight corporate debt
B)Asset-backed debt
C)Common stock
D)Preferred stock
E)Convertible debt

Question 23

Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms are called

A)top-tier bankers.
B)Section 20 affiliates.
C)venture capital firms.
D)ECNs.
E)discount brokerage houses.

Question 24

You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a gain. This is an example of

A)position trading.
B)program trading.
C)risk arbitrage.
D)pure arbitrage.
E)hedging.

Question 25

An investment banker agrees to a firm commitment offering of two million shares of Ace stock. The offer price is set at $55 and the spread is 50 cents per share. If the stock is actually sold to the public at $53.80,however,what is the investment banker's gain or loss?

A)$1,400,000 gain
B)$1,400,000 loss
C)$500,000 gain
D)$500,000 loss
E)None of the options

Question 26

An investment banker agrees to a best efforts offering of 2.5 million shares of Crew stock. The offer price is set at $35 per share. If the stock is actually sold to the public at $34.50 and the banker charges a 3.45 cent commission per share sold,what is the amount of funds Crew receives? (Ignore any other fees or expenses.)

A)$88,750,000
B)$87,500,000
C)$86,163,750
D)$85,176,430
E)$84,122,560

Question 27

In 2013,the top five underwriters engaged in about _____________ of total U.S. underwriting volume.

A)15 percent
B)22 percent
C)33 percent
D)44 percent
E)56 percent

Question 28

Which one of the following securities firms' activities is normally the most risky?

A)Best efforts offering
B)Private placement
C)Firm commitment offering
D)Pure arbitrage
E)Program trading

Question 29

The _________________ insures losses of funds deposited with securities firms in the event of failure of a securities firm.

A)SEC
B)NASD
C)SIA
D)SIPC
E)FDIC

Question 30

An unregistered issue sold to a few large institutional buyers is an example of a(n)

A)best efforts offering.
B)fully underwritten public offering.
C)shelf offering.
D)private placement.
E)SEC Rule 415 offering.

Question 31

Firms in the securities industry are required to maintain a minimum capital to asset ratio of ______________.

A)2 percent
B)4 percent
C)6 percent
D)8 percent
E)10 percent

Question 32

In July 2002,the U.S. Congress passed the Sarbanes-Oxley bill. Among other things,this bill
I) created an independent auditing oversight board run by the SEC.
II) increased penalties for corporate wrongdoers.
III) eliminated the use of stock options for executive compensation.

A)I only
B)I and II only
C)I and III only
D)II and III only
E)I,II,and III

Question 33

The largest asset on the typical securities firms' balance sheet in 2012 was

A)securities purchased under agreements to resell.
B)long positions in securities and commodities.
C)reverse repurchase agreements.
D)repurchase agreements.
E)cash.

Question 34

The trading activity involving purchases of large blocks of securities on the expectation of a favorable price move over the next several weeks or months is called

A)program trading.
B)pure arbitrage.
C)day trading.
D)position trading.
E)hedging.

Question 35

Which one of the following statements about venture capitalists is not correct?

A)Venture capitalists contribute to equity financing rather than make loans.
B)Venture capitalists are passive investors.
C)Most private venture capitalists are organized as limited partnerships.
D)The federal government licenses some private firms to provide lower-cost funds to entrepreneurs.
E)Angel venture capitalists are wealthy individuals who fund business start-ups.

Question 36

_____________ are examples of investment bankers offering traditional commercial banking services.

A)Online brokers
B)Cash management accounts
C)Underwriting corporate debt and equity offers
D)Venture capital funds
E)Mergers and acquisition services

Question 37

The largest liability of broker dealers in 2012 was

A)bank loans payable.
B)short positions in securities and commodities.
C)subordinated debt.
D)repurchase agreements.
E)equity.

Question 38

The major result of the NSMIA was to

A)reduce state regulatory powers over securities firms.
B)establish the SIPC.
C)create the NASD.
D)all of the options
E)none of the options

Question 39

An investment banker agrees to a firm commitment offering of 1.2 million shares of Bally stock. The offer price is set at $25.50 and the spread is 30 cents per share. If the stock is actually sold to the public at $26.00,however,what is the amount of funds Bally receives? (Ignore any other fees or expenses.)

A)$31,200,000
B)$30,600,000
C)$30,240,000
D)$29,280,000
E)$28,120,000

Question 40

Day-to-day trading practices of securities firms currently may be regulated by which of the following?
I) FINRA
II) SEC
III) Federal Reserve
IV) SIPC

A)I only
B)II only
C)I and II only
D)I and III only
E)II and IV only

Question 41

The anti-money laundering provisions of the U.S.A. Patriot Act requires securities firms to
I) verify the identity of any person seeking to open an account with their firm.
II) keep separate records of accounts originating from foreign countries.
III) determine whether the client appears on any lists of known or suspected terrorists or terrorist organizations.

A)I only
B)III only
C)I and II only
D)II and III only
E)I,II,and III

Question 42

Why is capital a more important measure of the size of a securities firm than the amount of assets?
What other measures would be useful,given the diversity of this industry?

Question 43

As a result of the alleged conflicts of interest between analysts and underwriting,which of the following changes were implemented?
I) Analysts cannot participate in nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue.
II) Analyst compensation can no longer be tied to the amount of underwriting business a firm generates.
III) Securities firms must divest stock research divisions to ensure independence from their investment banking business.

A)I only
B)I and II only
C)I and III only
D)II and III only
E)I,II,and III

Question 44

What did the Sarbanes-Oxley Act do to try and prevent additional scandals at corporations?
What more needs to be done to prevent additional scandals among investment bankers?

Question 45

What are soft dollar fees or commissions?
How can these lead to conflicts of interest for investment bankers?

Question 46

Describe an agency transaction (brokerage)and a principal transaction (dealer)that is involved in trading. What determines profits in each activity?
Which is riskier?

Question 47

Darby Minerals wants to hire an investment banker to sell two million shares of stock to the public. Darby is considering using either a firm commitment or a best efforts offering.
(a)If Darby goes with a firm commitment,the offer price will be $15.00 per share and the spread will be 25 cents a share and all two million shares will be sold. The actual sale price to the public is $14.55.
(b)Suppose that Darby uses a best efforts offering. The actual sale price to the public is again $14.55 and the investment banker charges 4 cents per share sold as commission. Assume that in the best efforts offer only 1.85 million shares can be sold.
What are the proceeds to Darby from the sale of stock in the firm commitment and the best efforts and what is the investment banker's gain or loss in each case?
Ignore any other costs and expenses.

Question 48

Classify the following trading activities as either a position trade,a pure arbitrage trade,or a risk arbitrage trade.
I. Buy Intel at $120 and hold it for six months in hopes of a price rise.
II. Buy GE on the NYSE and immediately sell it at a higher price on the Pacific Exchange.
III. Short sell Dell in anticipation of a poor quarterly earnings report.

Question 49

What are the major types of firms in the investment banking industry?
Briefly describe each.

Question 50

Why did profitability of security firms drop precipitously in 2005 and rebound in 2006 only to fall again in 2007?