Question 1

The ____ determines margin requirements on securities purchased.

Accepted Answer

The Federal Reserve Board determines margin requirements on securities purchased under Regulation T, which governs the extension of credit by brokers and dealers to customers for the purchase of securities.

Question 2

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

Accepted Answer

Securities firms act as intermediaries between corporations looking to issue bonds and the investors who buy them. They do not typically serve as lenders or investors in this context.

Question 3

The ____ can liquidate failing brokerage firms.

Accepted Answer

The Securities Investor Protection Corporation (SIPC) is responsible for liquidating failing brokerage firms to protect their customers.

Question 4

When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the securities firm, must be included in the ___________ that is submitted to the Securities and Exchange Commission.

Accepted Answer

The correct answer is B) registration statement. When an IPO is planned, the issuer must submit a registration statement to the Securities and Exchange Commission (SEC). This document includes all relevant information about the security being offered and the agreement between the issuer and the securities firm handling the IPO.

Question 5

Research indicates that securities firms tend to

Accepted Answer

Research shows that securities firms often underprice Initial Public Offerings (IPOs) to ensure that the IPO is fully subscribed and to create a positive market sentiment, which can lead to a successful first trading day and benefit the underwriters and early investors.

Question 6

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 ____.

Accepted Answer

The one-day return to investors who purchase IPO shares at the IPO offer price are typically high due to the initial surge in demand, but the returns to investors who purchase the shares a day after the IPO are generally low as the market adjusts and the initial excitement fades.

Question 7

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

Accepted Answer

The Deposit Insurance Fund, managed by the FDIC, is primarily involved in insuring deposits in banks and thrifts, not in the direct regulation of the securities industry. The other entities listed (B, C, D) are directly involved in the regulation and oversight of various aspects of the securities and financial markets.

Question 8

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

Accepted Answer

Divestiture is not a service related to placing bonds. It refers to the process of selling off subsidiary business interests or investments, which is different from the services like underwriting, distribution, and advising that are directly involved in the bond placement process.

Question 9

In a ____ of stock, all of the shares issued may be held by a small number of institutional investors.

Accepted Answer

In a private placement of stock, shares are sold directly to a small number of institutional or accredited investors, rather than through a public offering. This allows for a more streamlined process without the need for a full public offering's regulatory requirements.

Question 10

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

Accepted Answer

Securities firms typically engage in origination, underwriting, and distribution of stock or bond offerings, but setting regulatory rules for stock exchanges is a function usually performed by regulatory bodies or the exchanges themselves, not by individual securities firms.

Question 11

The ____ regulates the issuance of securities.

Accepted Answer

The Securities and Exchange Commission (SEC) is the federal agency responsible for regulating the issuance of securities, overseeing securities exchanges, and enforcing federal securities laws.

Question 12

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

Accepted Answer

The value of a securities firm is typically inversely related to interest rate movements because as interest rates rise, the cost of borrowing increases, which can reduce the firm's profitability and the value of its securities.

Question 13

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.

Accepted Answer

In a firm commitment, the securities firm (underwriter) guarantees a certain price to the issuing corporation by buying the entire offer itself and then reselling the shares to the public, thus taking on the risk of selling the shares at a higher price.

Question 14

Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.

Accepted Answer

Flotation costs as a percentage of the value of securities issued are typically lower for large issues because the fixed costs associated with issuing securities are spread over a larger amount of capital, reducing the cost per unit of capital raised.

Question 15

When a firm spins off a unit, it creates new shares of stock representing the unit and distributes them to its existing shareholders.

Accepted Answer

When a firm spins off a unit, it indeed creates new shares of stock for that unit and distributes them to its existing shareholders, allowing the shareholders to directly own a portion of the newly independent entity.

Question 16

Which of the following is NOT an SEC rule?

Accepted Answer

Analyst compensation should not be directly aligned with the amount of business they bring to the securities firm, as this could create conflicts of interest. The SEC rules are designed to promote objectivity and transparency in the analysis of securities.

Question 17

The price of newly issued stock should be ____ the market price of the firm's outstanding stock.

Accepted Answer

The price of newly issued stock is typically set to be about the same as the market price of the firm's outstanding stock to ensure fairness and market consistency. Pricing it similarly helps in attracting investors by offering the new shares at a market-competitive rate.

Question 18

After a target firm is acquired, the acquirer may sell off divisions of the target that are not compatible with the acquirer's business. This process is known as

Accepted Answer

Asset stripping refers to the process where the acquirer sells off parts of the acquired company that are not essential or compatible with its core business. This is often done to streamline operations or to raise capital.

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.

Accepted Answer

SEC Rule 144A allows for the sale of privately placed securities to qualified institutional buyers without the need for a full public registration, simplifying the process for issuing private securities.

Question 20

The ________ places limits on proprietary trading by commercial banks and securities firms that have become bank holding companies.

Accepted Answer

The Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in response to the financial crisis of 2008. It specifically aims to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers and could potentially put their depositors' funds at risk.

Quiz 24: Securities Operations