Deck 17: Investment Banking and Securities Law

Question 1

Which one of the following is an example of fraudulent activities?

A) Investing in bonds.
B) Using an accounting method that increases the earnings of the firm
C) Buying a large part of a new company and then selling it when the price increases
D) Spreading false rumours about a possible merger.

Answer 1

D

Question 2

The attractiveness of a Ponzi pyramid scheme consists of:

A) selling stocks with very high volatility to investors.
B) convincing investors to invest in assets from which they will never receive a return.
C) attracting investors by giving them a high return using new subscribers' money.
D) convincing investors to invest and then declaring bankruptcy.

Answer 2

C

Question 3

Which of the following is not one of the major factors the OSC uses to determine whether or not a document is really a security?

A) Whether the promoter raises money and leads the investor to expect a profit.
B) Whether there is risk involved.
C) Whether the investor has any control over how the money is spent.
D) Whether the investor is led to expect any additional pecuniary benefits.

Answer 3

D

Question 4

The Securities and Exchange Commission is:

A) a U.S. agency that regulates U.S securities.
B) a Canadian agency that regulates Canadian securities.
C) a North American agency that regulates the issue of securities outside the U.S.
D) none of the above.

Question 5

Which of the following is not a mechanism designed to maintain investor confidence in capital markets?

A) Corporate law
B) Securities legislation
C) Due diligence
D) Due process

Question 6

When interest payments are made by mailing a cheque to the officially listed owner,the bonds must have been issued in ______ form.

A) registered
B) consolidated
C) bearer
D) booked

Question 7

Which of the following is a fraudulent activity?
I)Selling stocks on an institution where there is zero external activity.
II)Selling penny stocks as blue chip stocks

A) I and II are fraudulent.
B) I and II are not fraudulent.
C) I is fraudulent and II is not fraudulent.
D) I is not fraudulent and II is fraudulent.

Question 8

In determining whether a security exists,the OSC looks at:

A) whether the promoter raises money and leads the investor to expect a profit.
B) whether the investor has any control on how the money is spent.
C) whether there is risk involved.
D) all of the above.

Question 9

Due diligence refers to:

A) the process of auditing the financial statements.
B) the process of checking securities offered to the public to ensure they are legitimate.
C) the process of convincing investors to invest in assets.
D) none of the above.

Question 10

Use the following statements to answer this question:
I)Asymmetric information is not supposed to exist in efficient markets.
II)Investors protect themselves fully from asymmetric information by asking for high premiums

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 11

The bonds must have been issued in ______ form,if coupons representing interest payments are to be physically attached to the security and it is the bondholder's responsibility to submit the coupons for payment,

A) registered
B) consolidated
C) bearer
D) booked

Question 12

Suppose that the current market interest rate is 12% for non-fraudulent bonds,and that one in six bonds are fraudulent in a given market.What would the interest rate be if a fraud premium is introduced,assuming (1)a one-year investment horizon and (2)the market does not require a risk premium?
a) 68.0%
b) 40.0%
c) 34.4%
d) 10.0%

Question 13

To which of the following does Gresham's Law apply?

A) The used car market
B) Counterfeit money in circulation
C) Capital markets
D) Gresham's Law is applicable to all of the above.

Question 14

What does the acronym SEC stand for in regards to the financial system?

A) Security Exchange of Canada
B) Securities and Exchange Commission
C) Security Enforcement Coalition
D) Stock Exchange of Canada

Question 15

Why is there a resistance to implementing a federal regulator in Canada?

A) The federal government is reluctant to intervene in the financial marketplace.
B) The provincial governments are earning prohibitive profits from having control.
C) Some provinces will have to give up control.
D) Federal laws prohibit the federal government from intervening in securities regulation.

Question 16

Which of the following potentially result from investors losing faith in the capital market?

A) Increased off-shore investing
B) Increased investing in real assets like houses and gold
C) The complete collapse of public capital markets
D) All of these are potential consequences of the loss of investor faith in the capital market.

Question 17

When does a "financing gap" occur?

A) When a firm raises capital in the market by selling unequal amounts of bonds and equity, and the gap is the difference between the two amounts.
B) When firms are unable to find investors to purchase their securities.
C) When there is a period of time occurring between cash outflows from a project and the cash inflows from the project financing.
D) Each of the above is an example of a financing gap.

Question 18

Sal Bender,not one of the most upstanding citizens,has just been arrested for financial fraud,after he cooked up a get-rich-quick scheme that enticed people to purchase $10 million worth of his interest-bearing bonds.He had promised the investors quarterly coupon payments of $50 each,and that he would return the face value of $1,000 at maturity in five years.The current market interest rate is 7%.His scheme was successful initially,but within four months,it blew up in his face when the police came for him at his beach house in Barbados.Based on your knowledge of bonds,what was the biggest flaw in Sal's scheme?

A) Offering such a high yield to maturity compared to the current market rate tipped off the authorities.
B) Making quarterly payments instead of semi-annual payments increased the upfront costs.
C) Using interest-bearing instead of zero-coupon bonds required him to make coupon payments.
D) There was no flaw in Sal's plan - he was just unlucky and got caught.

Question 19

Which of the following cases is not an example of asymmetric information?

A) Gus buys a used car from Artie's Ambiguous Autos Inc., not knowing it is a lemon.
B) Gus buys a used car from Artie's Ambiguous Autos Inc., knowing it is a lemon.
C) Gus, a small retail investor, purchases shares in Artie's Ambiguous Autos Inc.
D) Gus, a mutual fund manager, purchases shares in Artie's Ambiguous Autos Inc.

Question 20

Asymmetric information is best defined as:

A) information that is available to both parties in a deal and which can be exploited equally by each.
B) information that is available to neither party in a deal.
C) information that is available to one party in a deal but is not available to the other.
D) any information provided by insiders of the firm.

Question 21

Which of the following is not an essential part of a prospectus?

A) Auditor's report
B) A letter from the president giving broad facts about the company
C) Details of future equity issues
D) Compensation to be received by company directors and senior executives

Question 22

Which of the following is/are the major areas in which the OSC is involved?

A) Primary and secondary market offerings
B) Activities of investment professionals
C) Takeover bids
D) All of the above areas

Question 23

Which of the following is not one of the bases of the three major categories of exempt purchasers?

A) Sophistication level of the purchaser
B) Low-risk nature of the instrument
C) Dollar value of the potential issue
D) Existence of alternative source of money

Question 24

The Ontario Securities Commission has regulated which of the following?

A) Distribution of shares.
B) Control blocks.
C) Restricted shares.
D) All of the above.

Question 25

Use the following statements to answer this question:
I)Risk of information asymmetry is high in an IPO because the company's public disclosure,as a public firm,is minimal.
II)An IPO prospectus eradicates the issue of information asymmetry completely.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 26

A prospectus is mandatory for all securities issuances except:

A) securities targeting the general public.
B) corporate bond issuances.
C) if a very small amount of money is being raised.
D) sale of a control block.

Question 27

Which of the following is not true about a prospectus?

A) The investment dealer helps in the preparation of the document and is legally liable.
B) The CFO rather than CEO signs the document on behalf of the board of directors.
C) All parties involved in the process are supposed to do their best to ensure the consistency of the information provided.
D) It should be a detailed and honest disclosure of information about the firm.

Question 28

If you are reading an IPO prospectus,in which form must it be?

A) Short-form prospectus, due to the company's shorter history
B) Long-form prospectus, due to the greater risk
C) Either short or long-form, as long as a prospectus is filed
D) A prospectus is not required for an IPO.

Question 29

The acronym IPO stands for:

A) Initial Public Offering
B) Investment Public Offering
C) Intrinsic Put Option
D) Initial Private Offering

Question 30

Use the following statements to answer this question:
I)Improvements in securities laws have helped in curbing fraudulent activities.
II)Asymmetry of information is the major source of frauds in financial markets.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 31

Which of the following is part of a prospectus?

A) Description of the proposed business activity
B) Description of the potential market
C) Description of the risk factors
D) All of the above

Question 32

Put the following IPO process stages into chronological order:
I)Initial filing
II)Preliminary prospectus
III)Pricing and distribution
IV)Investment bank discussion

A) I, II, III, IV
B) IV, II, I, III
C) I, IV, II, III
D) IV, I, II, III

Question 33

What are the main differences between a prospectus and an offering memorandum?

A) A prospectus is shorter and costs less to prepare than an offering memorandum.
B) Offering memorandums are shorter and cost less to prepare than prospectuses.
C) A prospectus costs less to prepare but is longer than an offering memorandum.
D) Prospectus and offering memorandum are two different names for the same document.

Question 34

If you are handed a formal summary of a security that describes the costs,investment objectives,and risks involved,what are you reading?

A) Annual report
B) Prospectus
C) Auditor report
D) Proxy statement

Question 35

Generally,underwriters provide which of the following services to the issuing firm?

A) Strategic business advice
B) Pricing the issue
C) Determination of the spread
D) All of the above

Question 36

Which of the following is not a reason for a firm to go public?

A) Founders who are no longer actively involved in the company can cash out.
B) Increased access to financing options.
C) Decreased reporting regulations for public companies.
D) Greater access to larger markets.

Question 37

What is venture capital?

A) Money raised from private investors in the exempt market.
B) Money raised from public investors in the capital market.
C) Money raised from private investors in the over-the-counter market.
D) All of the above are examples of venture capital.

Question 38

Use the following statements to answer this question:
I)One of the most frequently cited reasons of why a firm goes public is because investors want to cash out.
II)Obtaining cheaper sources of financing over the long term is a potential reason for an IPO.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 39

The term "red herring" refers to the:

A) Underwriting agreement
B) Preliminary prospectus
C) Bought deal
D) IPO

Question 40

What is the exempt market?

A) The regulated market for non-registered securities that raises money from private investors.
B) The unregulated market for registered securities that raises money from private investors.
C) The regulated market for registered securities that raises money from public investors.
D) The unregulated market for non-registered securities that raises money from private investors.

Question 41

Generally,initial public offerings (IPOs)are:

A) fairly priced.
B) overpriced.
C) underpriced.

Question 42

Use the following statements to answer this question:
I)"Leaving money on the table" refers to the underperformance of stocks in the long term.
II)Underpricing in Canada is higher than in the U.S.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 43

What is the spread for an investment dealer who purchases shares for a fixed price of $13 each and resells them to the public at a price of $15 each?
a) $2
b) $15
c) $28
d) The spread can only be determined when the number of shares both purchased and sold is known.

Question 44

The filing of quarterly and annual financial statements,annual information forms,and proxy and information circulars is a main component of which of the following:

A) Continuous disclosure
B) Due diligence
C) Fair disclosure
D) Standard reporting for all public and private companies

Question 45

Which of the following statements is not true about underpricing?

A) It "leaves money on the table."
B) It is done to get more IPO proceeds for the issuing firm.
C) It is calculated as the difference between the initial offering price and the price on the first day of trading.
D) It involves pricing an IPO at less than its market value.

Question 46

Concordia Partners (CP)has recently underwritten a firm commitment public offering from Laurentide Resort Inc.(LR).However,after three customers died and many others were seriously injured while using LR products,large lawsuits have been raised against the firm,and the demand for LR shares has dwindled to nothing.Which of the following provisions might save CP from having to market an unprofitable issue?

A) Green-shoe provision
B) Market out clause
C) Unforeseen events provision
D) As it was a firm commitment offering, CP must absorb any losses from underwriting the issue.

Question 47

Evaluate the following statement:
A short-form prospectus is required for a seasoned offering.

A) True
B) False

Question 48

Montreal Dealers Inc.(MD),a Canadian underwriting firm,has just underwritten an issue by PublicDomaine.com,and the total proceeds of the issue are $15 million.MD charges an underwriting fee of 4 percent.MD bought the 1,000,000 shares from PublicDomaine for $12 and sold them to the public for $15 each.What is the total compensation MD obtained?
a) $2.6 million
b) $0.6 million
c) $3.6 million
d) $3.52 million

Question 49

A short-form prospectus incorporates which of the following?

A) The nature and pricing of the securities.
B) All corporate information.
C) Both of the above.

Question 50

Use the following statements to answer this question:
I)Spinning encourages underpricing in the market.
II)Spinning is unethical.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 51

Which of the following offering types can only be used with seasoned offerings?
I)Bought deal
II)Best efforts
III)Firm commitment
IV)Standby offering

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

Question 52

Which of the following is not one of the reasons that have been advanced for the high level of underpricing in the U.S.?

A) Too much competition
B) The threat of litigation
C) Lowering the risk for the underwriter
D) IPO spinning

Question 53

A low quality issuer wishing to reduce issuing expenses should NOT choose to have their new issue made on a(n)____ basis.

A) escrow
B) best efforts
C) letter
D) bought deal

Question 54

How is the compensation to a Canadian investment dealer determined?

A) A standard 2% underwriting fee (based on gross proceeds) plus the total value of the spread.
B) A standard 4% underwriting fee (based on gross proceeds) plus the total value of the spread
C) A standard 2% underwriting fee (based on net proceeds) plus the total value of the spread
D) A standard 2% underwriting fee (based on gross proceeds)

Question 55

In a ______ offering,common shares are offered at a discount to investors who already own shares.

A) bought deal
B) firm commitment
C) standby or rights
D) best efforts

Question 56

Which of the following activities is allowed during the quiet period?

A) Hyping the stock to help sell it.
B) Issuing an analyst report recommending the shares.
C) Reducing the price.
D) Trading in the shares by the lead underwriter.

Question 57

The overallotment or green-shoe option allows:

A) the issuing firm to take back any unsold shares from the underwriter so that an underwriting fee need not be paid for these shares.
B) the underwriting firm to charge a higher price for the shares in cases of very high demand.
C) the underwriting firm to buy more shares from the issuing firm if investor demand is strong.
D) the founder of the firm to sell his or her shares at a higher issue price in the case of strong investor demand.

Question 58

Which of the following is not a function of the lead underwriter in supporting the stock during the distribution period?

A) Trading against other members of the underwriting syndicate.
B) Using the overallotment option.
C) Putting as many shares as possible in friendly hands to be able to materialize the sell.
D) Avoiding the use of the "out clause" as much as possible.

Question 59

Which of the following is not one of the differences between limit and market orders?

A) Limit orders define the price at which the shares will be purchased while market orders are independent of the final price.
B) Limit orders are usually made by major institutions while retail investors make market orders.
C) The amount of shares that can be purchased with a limit order is pre-specified by the underwriter, while market orders can be for any number of shares.
D) Limit orders are expressions of interest while market orders are for fixed amounts.

Question 60

Which of the following is not one of the four main types of public offerings?

A) Bought deal
B) Standby offering
C) Best efforts offering
D) Green-shoe offering

Question 61

Briefly explain the term "underpricing."

Question 62

Identify two types of firms that may have their newly issued securities distributed on a best efforts basis,and discuss why this basis would be used.

Question 63

Explain the importance of the lock-up period in the asymmetry of information minimization process.

Question 64

The little company you and your friend started in your parents' garage has grown so much that you are now ready to take the firm public.In your discussions with one of the top investment dealers,you have been given a choice between two alternatives:
Plan I: The investment dealer will underwrite the issue of 1 million shares at $14 per share.There will be an underwriting fee of 7 percent of the gross proceeds.
Plan II: The investment dealer will accept the 1 million shares on a "best efforts" basis.The price will be $15 per share,and it is believed that 95 percent of the shares will be sold.The investment dealer's fee will be $950,000.
What will the net proceeds be under each plan? What will the investment dealer charge under each plan? Which plan should you accept?

Question 65

Discuss some challenges with initial public offerings (IPOs).

Question 66

Describe a potential conflict of interest that may arise when an investment dealer underwrites a new equity issue on a bought deal basis.

Question 67

Identify and describe the two ways a new issue of securities can be distributed by the underwriter.

Question 68

Distinguish between the following: public offering,private placement,and rights offering.

Question 69

Discuss the differences between a letter of intent from the underwriter to the issuer and an underwriting agreement.