Deck 4: Financial Services: Securities Brokerage and Investment Banking

Question 1

4-1 Investment banks specialize in the origination,underwriting,and distribution of securities issues.

Answer 1

True

Question 2

4-19 Market making involves creating a primary market in a financial asset.

Answer 2

False

Question 3

4-6 The Financial Services Modernization Act of 1999 and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms.

Answer 3

True

Question 4

4-14 In a public offering,an investment banker places new issues of securities with a handful of private,usually large,investors.

Question 5

4-13 Because the business of funds management generates fees based on the size of the pool of assets managed,the flow of income is larger than either investment banking function or the trading function.

Question 6

4-20 Market makers in a stock are obliged to buy shares from sellers when the market for the stock is declining.

Question 7

4-11 National full-line investment banks and securities firms provide business services to both
retail and corporate customers.

Question 8

4-12 The objective of funds management is to allocate assets so that they outperform relative risk-return tradeoffs.

Question 9

4-10 As of the first half of 2009,there were over 5,900 securities firms in operation.

Question 10

4-15 Initial public offerings (IPOs)are first-time issues of firms whose equity has not previously traded in an organized market.

Question 11

4-8 As of October 1987,there were over 9,500 securities firms and investment banks.

Question 12

4-17 A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering.

Question 13

4-5 Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.

Question 14

4-7 The number of investment banks and securities firms expanded rapidly from 1980 to October 1987.

Question 15

4-18 Brokerage commissions for securities firms decreased after fixed commissions on trades were abandoned by the SEC in May 1975.

Question 16

4-9 As of the first half of 2009,income generated by securities brokerage accounted for over 65% of commercial bank holding company fee income.

Question 17

4-2 Investment banks engage in activities such as advising on mergers,acquisitions,and corporate restructuring.

Question 18

4-4 The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987.

Question 19

4-3 Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.

Question 20

4-16 In order for an investment bank to perform a firm commitment offering of securities,they must maintain at least 20% equity on their balance sheet.

Question 21

4-25 In pure arbitrage,a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price.

Question 22

4-29 Activity and performance trends in the investment banking industry are highly correlated with general economic expansions and recessions.

Question 23

4-24 The change to decimalization of stock market transactions has lead to an increase in income from the market making activity of investment banks and securities firms.

Question 24

4-32 The goal of the Sarbanes-Oxley Act is to prevent deceptive accounting and management practices and thus to increase confidence in corporate governance.

Question 25

4-26 Cash management accounts were an early attempt by commercial banks to provide investment banking services.

Question 26

4-35 Investment banks and securities firms are less internationally involved than other domestic financial service industries.

Question 27

4-28 The principal reasons for the growth in profitability of the securities industry in the middle 1990s were the trading profits from fixed income securities and the growth in new issue underwriting.

Question 28

4-31 The largest source of funding for securities services firms and investment banks is broker-call loans from commercial banks.

Question 29

4-38 The most common benchmark of relative size of a firm in the securities trading and underwriting industry is based on

A)total asset value.
B)total equity.
C)total debt.
D)annual sales.
E)annual profits.

Question 30

4-30 Most securities firms are subject to large amounts of interest rate and market risk because of the large amount financial assets on the balance sheet.

Question 31

4-34 Seeking international partners is a recent trend among securities firms and investment banks.

Question 32

4-22 Principal transactions allow the market maker to always make a profit whether or not the market price for a specific stock is rising or falling.

Question 33

4-40 Which of the following would be a key area of activity for an investment bank specializing in the commercial side of the business?

A)Purchase of existing securities.
B)Sale of securities in the secondary market.
C)Brokerage of existing securities.
D)Underwriting issues of new securities.
E)All of the above.

Question 34

4-33 The U.S.A.Patriot Act requires firms to implement processes to deter money laundering.

Question 35

4-37 By mid-year 2009,there were approximately ________ securities firms and investment banks operating.

A)9,100
B)7,600
C)5,200
D)4,800
E)2,200

Question 36

4-23 Decimalization involves making quotes in the equities markets in units of 1 cent ($0.01)rather than in units of one-eights of a dollar ($0.125).

Question 37

4-21 Agency transactions of market makers are two-way transactions on behalf of customers

Question 38

4-36 Securities firms and investment banks are more involved internationally than other member of the financial services industries.

Question 39

4-39 Which of the following differentiates securities firms from investment banks?

A)Securities firms are concerned with the commercial side of the business while investment banks are concerned with the retail side of the business.
B)Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.
C)Securities firms underwrite new issues of securities while investment banks provide brokerage services.
D)Securities firms originate new issues of securities and investment banks underwrite the securities.
E)Securities firms are concerned with private placements of securities whereas investment banks are concerned with publicly traded securities.

Question 40

4-27 Cash management accounts did not exist before 1999.

Question 41

4-45 In market-making

A)agency transactions are two-way transactions on behalf of customers,such as a dealer working for a fee or commission.
B)agency transactions are when market makers take long or short positions and seek profits on price movements.
C)market makers take inventory positions to stabilize the market in the securities.
D)Answers A and C only.
E)Answers B and C only.

Question 42

4-41 Which of the following is true?

A)Investment bankers earn fees based on the success of their placements when they underwrite using a best-efforts basis.
B)Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis.
C)With best-efforts underwriting,investment bankers act as principals where they purchase the securities from the issuer and sell them at a higher price.
D)Answers A and B only.
E)Answers B and C only.

Question 43

4-59 The process of providing custody and escrow services,clearance and settlement services,and research and other advisory services by a securities firm involves the function of

A)mergers and acquisitions.
B)market making.
C)investment banking.
D)back-office functions.
E)cash management services.

Question 44

4-47 What term refers to the process in which an IPO share allocation is used for the purpose of enticing future investment banking business from customers?

A)Dumping.
B)Redlining.
C)Intermediation.
D)Externalization.
E)Spinning.

Question 45

4-51 The largest category of liabilities of broker-dealers as of the beginning of 2009 was

A)bank loans payable.
B)securities sold under repurchase agreements.
C)payables to customers.
D)short positions in securities and commodities.
E)payables to non-customers.

Question 46

4-53 National full-line firms

A)may specialize in providing service to both retail and corporate customers.
B)usually serve only as discount brokers without offering investment advice.
C)may specialize more in corporate finance with high activity in trading securities.
D)All of the above.
E)Answers A and C only.

Question 47

4-44 Which of the following is true of private placements?

A)Securities are placed with few large institutional investors.
B)Securities of private firms are sold to the investing public at lower prices.
C)They must be registered with the SEC.
D)Public trading in these securities is not allowed.
E)Subject to more stringent disclosure and informational requirements than those imposed by the SEC on publicly registered issues.

Question 48

4-56 Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of

A)investing.
B)merger and acquisitions.
C)market making.
D)investment banking.
E)trading.

Question 49

4-50 The largest category of assets for broker-dealers as of the beginning of 2009 was

A)receivables from other broker-dealers.
B)securities purchased under agreement to resell.
C)receivables from customers.
D)exchange membership.
E)long position in securities and commodities.

Question 50

4-42 Discount brokers

A)are securities firms focused on providing research support for customers.
B)conduct trades for customers but do not offer investment advice.
C)allow customers to receive investment advice at very low rates.
D)effect trades for customers on- or offline while offering investment advice.
E)are electronic trading securities firms that allow customers to trade without the use of a broker.

Question 51

4-57 Offering bank deposit-like accounts to individual customers by a securities firm involves

A)the function of investing.
B)the function of cash management.
C)the function of market making.
D)the function of trading.
E)the function of investment banking.

Question 52

4-60 Which of the following is NOT a back-office service function in the securities industry?

A)Correspondent banking services.
B)Escrow services.
C)Clearance of securities transactions.
D)Research services.
E)Services related to settlement of securities transactions.

Question 53

4-54 The management of pools of assets by securities firms is considered to be the function of

A)market making.
B)investment banking.
C)trading.
D)investing.
E)cash management.

Question 54

4-58 The primary advantage to the investor of a brokerage firm cash management account (CMA)over commercial bank deposit accounts is that

A)no FDIC insurance is required on CMAs.
B)no regulatory oversight of CMAs.
C)they make it easier to buy and sell securities using funds from the CMA.
D)CMAs guarantee higher rates of return than money market deposit accounts.
E)Regulation Q interest rate ceilings do not apply to CMAs.

Question 55

4-49 Pure arbitrage trading involves

A)buying blocks of securities in anticipation of some information release.
B)purchase of stock in a company being acquired and the sale of stock in the acquiring company.
C)exploitation of a difference between a company's current value and its estimated liquidation value.
D)buying an asset in one market at one price and selling it immediately in another market at a higher price.
E)simultaneous purchase and sale of similar shares in a single market.

Question 56

4-46 In market-making

A)principal transactions are two-way transactions on behalf of customers,such as a dealer working for a fee or commission.
B)principal transactions are when market makers take long or short positions and seek profits on price movements.
C)market makers take inventory positions to stabilize the market in the securities.
D)Answers A and C only.
E)Answers B and C only.

Question 57

4-55 Creating a secondary market in an asset by a securities firm involves the function of

A)cash management.
B)investing.
C)market making.
D)trading.
E)investment banking.

Question 58

4-48 Which of the following is NOT considered a trading activity of securities firms?

A)Position trading.
B)Pure arbitrage.
C)Liquidity trading.
D)Risk arbitrage trading.
E)Program trading.

Question 59

4-43 Which of the following is most typical of broker-dealers?

A)They assist in underwriting of new securities.
B)They assist in trading of existing securities.
C)They assist in issuing new securities.
D)They assist in underwriting and distribution of new securities.
E)All of the above.

Question 60

4-52 In comparison to a typical commercial bank,an investment bank is likely to have

A)lower levels of capital.
B)higher reliance on long-term debt.
C)lower levels of repurchase agreements.
D)higher levels of net interest margin.
E)higher levels of loans to customers.

Question 61

4-77 Which of the following two investment banks were acquired by financial services holding companies during the most recent financial crisis?

A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.

Question 62

4-61 An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called

A)risk arbitrage.
B)an agency transaction.
C)best efforts underwriting.
D)spinning.
E)a principal transaction.

Question 63

4-68 The Securities Investor Protection Corporation (SIPC)protects investors against losses of up to ____ on securities firm failures.

A)$100,000
B)$200,000
C)$500,000
D)$1,000,000
E)$50,000

Question 64

4-63 Securities firms have equity ratios that are lower than those for commercial banks because their balance sheets contain a larger portion of

A)illiquid assets.
B)current liabilities.
C)long term liabilities. d fixed assets.
E)liquid assets.

Question 65

4-64 Program trading involves

A)online trading services provided to customers by electronic trading securities firms.
B)computer-driven buying or selling of baskets of 15 or more stocks by institutional traders.
C)purchase and sale of assets that are potentially but not necessarily equivalent.
D)buying blocks of securities in anticipation of some information release.
E)providing a platform for customers to trade without the use of a broker.

Question 66

4-66 Legislation designed to improve corporate governance practices,especially as they relate to accounting practices,is the

A)National Securities Markets Improvement Act of 1996.
B)Sarbanes-Oxley Act.
C)U.S.A.Patriot Act.
D)Financial Services Modernization Act of 1999.
E)Bank Holding Company Act.

Question 67

4-74 Considering the securities firms and investment banking industries,The National Securities Markets Improvement Act (NSMIA)of 1996

A)appointed the Federal Reserve System as the primary regulator of the industry.
B)diminished the role of the National Association of Securities Dealers (NASD)in regulating the industry.
C)allowed individual states the right to require registration of firms operating in the state.
D)effectively affirmed the SEC as the primary regulator of the industry.
E)required all firms in the industry to maintain minimum amounts of capital.

Question 68

4-71 Which of the following is true about reverse repurchase agreements?

A)They are securities purchased under agreements to resell.
B)They account for less than 5 percent of assets of broker-dealers.
C)They amount to 40.8 percent of total liabilities and equity of broker-dealers.
D)They are treated as liabilities.
E)They are securities temporarily lent in exchange for cash received.

Question 69

4-73 Which of the following is a self-regulatory organization involved in the day-to-day regulation of trading practices?

A)Securities and Exchange Commission.
B)New York Stock Exchange.
C)Securities Investor Protection Corporation.
D)Chicago Board of Trade.
E)All of the above.

Question 70

4-65 SEC Rule 415 relates to

A)private placements.
B)shelf-offerings.
C)ownership reports.
D)insider trading.
E)margin requirements.

Question 71

4-75 Which of the following 2 firms survived as investment banks following the most recent financial crisis?

A)Morgan Stanley and Bear Stearns.
B)Goldman Sachs and Merrill Lynch.
C)Lehman Brothers and Morgan Stanley.
D)Merrill Lynch and Lehman Brothers.
E)None of the above.

Question 72

4-80 As of mid-year 2009,approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies.

A)$ 2.1 billion
B)$ 8.6 billion
C)$14.7 billion
D)$16.4 billion
E)$19.2 billion

Question 73

4-78 Which of the following two investment banks were granted approval to be chartered as commercial banks during the most recent financial crisis?

A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.

Question 74

4-67 The U.S.A.Patriot Act requires financial services firms to

A)verify the identity of any person seeking to open an account.
B)maintain records of the information used to verify a person's identity.
C)determine whether a person opening an account is on a list of suspected terrorists.
D)All of the above.
E)Answers A and C only.

Question 75

4-69 According to SEC Rule 415,

A)larger corporations can register their new issues with the SEC up to two years in advance.
B)firms should disclose soft dollar arrangements to their clients.
C)large investors are allowed to begin trading privately placed securities among themselves.
D)firms are required to maintain records of the information used to verify the identity of a person opening an account.
E)publicly held companies must disclose all material information that might affect investment decisions to all investors at the same time.

Question 76

4-76 Which of the following investment banks failed as a result of the most recent financial crisis?

A)Morgan Stanley.
B)Bear Stearns.
C)Lehman Brothers.
D)Goldman Sachs.
E)Merrill Lynch.

Question 77

4-79 As of mid-year 2009,approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies.

A)15 percent
B)25 percent
C)40 percent
D)50 percent
E)65 percent

Question 78

4-72 Which of the following is NOT a provision of Sarbanes-Oxley Act?

A)Created an independent auditing oversight board.
B)Increased penalties for corporate wrongdoers.
C)Forced faster and more extensive financial disclosure.
D)Created avenues of recourse for aggrieved shareholders.
E)Required investment analysts' compensation to be a function of the quality and accuracy of research they produce.

Question 79

4-62 Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to

A)research and other advisory services.
B)custody and escrow services.
C)clearance and settlement services.
D)banking services.
E)back office services.

Question 80

4-70 Identify a major reason behind the increase in domestic underwriting activity during the 1990s.

A)Enhanced non-trading profits.
B)High long-term interest rates.
C)Low long-term dividend rates.
D)Growth in the asset-backed securities market.
E)Decreased securitization of debt.