Question 1

The managing investment banker is typically responsible for

Accepted Answer

The managing investment banker is responsible for all of these options. They must put together a syndicate to aid in the distribution and share the underwriting risk, determine the value of the company, and stabilize the offering during the distribution period.

Question 2

When investment bankers act in the function of "underwriters," they

Accepted Answer

When investment bankers act as underwriters, they give a "firm commitment" to purchase the securities from the corporation at a set price, meaning that they agree to purchase the unsold securities if they cannot be sold to investors. This provides the corporation with certainty and reduces their risk.

Question 3

If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
The percentage spread must be calculated between the retail price and the price paid to the issuer, rather than within the syndicate.

Accepted Answer

The question is asking about the spread between the retail price and the syndicate members' price, not the price paid to the issuer. Therefore, the percentage spread is calculated within the syndicate, making option B the correct answer.

Question 4

Generally, the larger amount of shares issued means that the spread percentage would be lower.

Accepted Answer

The spread percentage is the difference between the bid and ask price, and it can be affected by various factors such as market liquidity, trading volume, and the number of shares issued. Generally, when there is a larger amount of shares issued, it means that there is more trading activity and liquidity in the market, which can lead to a smaller spread percentage. This is because there are more buyers and sellers in the market, which increases the competition and narrows the bid-ask spread. Therefore, a larger amount of shares issued can often result in a lower spread percentage.

Question 5

Raybac is about to go public. Its present stockholders own 500,000 shares. The new public issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5% spread. The out-of-pocket costs in addition to the spread will be $450,000. What are the net proceeds to Raybac?

Accepted Answer

700,000 shares
$25.00 public price
$17,500,000 total cash inflow
450,000 out-of-pocket costs
$17,050,000 cash before underwriting fees
875,000 underwriting fees to investment banker (17,500,000 total cash inflow × .05 spread)
$16,175,000 cash left for firm
Please note that the out-of-pocket costs are in addition to the spread.

Question 6

Investment banking is changing dramatically into an industry where

Accepted Answer

Investment banks are growing larger to manage more risk internally, reducing their reliance on large syndicates for distributing initial public offerings (IPOs). This allows them to have more control over the process and potentially increase their profits.

Question 7

Stock prices for Amazon and eBay managed to avoid the turbulent price movements that followed the collapse of the Internet bubble.
Both equities took enormous hits and saw sharp price adjustments downward, but unlike many others they managed to recover strongly.

Accepted Answer

The answer of Stock prices for Amazon and eBay managed...

Question 8

A lower equity spread usually means that there is a lower amount of uncertainty in equity compared to other types of capital.

Accepted Answer

A lower equity spread indicates a lower level of uncertainty or risk in the equity market, which typically makes it a more stable form of capital compared to other types like debt or derivatives.

Question 9

Which of the following activities is not a service provided by investment bankers?

Accepted Answer

Investment bankers do not raise capital via mutual fund offerings. This is typically done by mutual fund managers or financial advisors. Investment bankers provide services such as underwriting initial public offerings, advising in mergers and acquisitions, and providing advice on restructurings.

Question 10

The investment banker may advise clients on a continuing basis about

Accepted Answer

The investment banker provides advice to clients on all these options, including the types of securities to be sold, the number of shares for distribution, and the timing of the sale.

Question 11

The investment banker's function involves all of the following EXCEPT

Accepted Answer

While an investment banker may provide advice on long-range financial planning, they cannot guarantee that a given amount of equity can be sold. Market conditions are constantly changing and there are no guarantees in the world of finance.

Question 12

An investment banker most commonly makes money from

Accepted Answer

An investment banker makes money from the spread between the issue price (what the security is sold for) and the proceeds to the issuer (what the issuer receives). This is commonly referred to as the underwriting spread. Commissions from buyers and fees from other investment bankers in the syndicate may be involved in the process, but they are not the primary source of revenue for the investment banker. Artificially supporting the stock price during or after an offering would be unethical and potentially illegal.

Question 13

The risk function of investment banking is categorized mainly under

Accepted Answer

The underwriting function involves the risk of guaranteeing the sale of a new security issue by agreeing to purchase unsold securities at a certain price. This involves a significant level of risk for the investment bank, as they may struggle to find buyers for the securities and end up holding a significant loss. Therefore, the risk function of investment banking is primarily categorized under the underwriting function.

Question 14

Which of the following is not a key role of an investment banker?

Accepted Answer

Acting as a transfer agent is not a key role of an investment banker. A transfer agent is responsible for maintaining records of ownership of a company's securities and assisting with the transfer of ownership between buyers and sellers. This function is typically outsourced to a specialized transfer agent company, rather than being handled by an investment banker. Market-making, underwriting, and acting as an agent in private placements are all key roles of investment bankers.

Question 15

Which investment bank underwrote the most bonds in 2013 and 2014?

Accepted Answer

According to data from Bloomberg, J.P. Morgan underwrote the most bonds in both 2013 and 2014, making it the best choice.

Question 16

The Glass-Steag all Act prohibited

Accepted Answer

The Glass-Steagall Act of 1933 prohibited commercial banks from combining investment banking and commercial banking functions. The act's purpose was to prevent banks from taking excessive risks with their customers' deposits. However, the act was repealed in 1999, which paved the way for the creation of large financial conglomerates that engage in both commercial and investment banking activities.

Question 17

Investment banking is highly concentrated with the top 10 underwriters controlling 90% of the global market for stocks and bonds.
The percentage is over half, but does not approach 90%.

Accepted Answer

While investment banking is concentrated, the top 10 underwriters do not control 90% of the global market; the percentage is significant but not that high.

Question 18

Because of their lower levels of risk to the underwriter, and smaller issuances have lower spread percentages than large issuances.
The smaller the issue, the higher the fees as a percentage of offering price; hence, the greater the spread.

Accepted Answer

The statement is incorrect. Smaller issuances actually have higher spread percentages as a percentage of offering price, hence the lower the fees. This is because the underwriting risks are higher for smaller issuances.

Question 19

In issuing stock, the term "spread" refers to

Accepted Answer

The spread refers to the difference or gap between what a corporation receives in proceeds from new issues of stock and what the public investors pay for the stock. This difference represents the underwriting fees, commissions, and other costs associated with the stock issuance process.

Question 20

If the retail price of a stock issuance is $17.50 and the issuers' price is $15.50, the total spread is 11.4%.
The percentage spread must be calculated between the retail price and the price paid to the issuer, rather than within the syndicate.

Accepted Answer

The statement correctly states that the percentage spread between the retail price and the issuer's price must be calculated, rather than within the syndicate.

Quiz 15: Investment Banking