Question 1

The Security Investor Protection Corporation (SIPC)protects investors against losses of up to $25,000,000 caused by the failure of a securities firm.

Accepted Answer

The SIPC protects investors against the loss of cash and securities (such as stocks and bonds) held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.

Question 2

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

Accepted Answer

The answer of The most common benchmark of relative size...

Question 3

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

Accepted Answer

The U.S.A. Patriot Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) requires firms to implement processes to deter money laundering and detect and report suspicious activity.

Question 4

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.

Accepted Answer

Securities firms typically hold large amounts of financial assets on their balance sheets, such as stocks, bonds, and derivatives. Changes in interest rates and market conditions can affect the value of these assets, resulting in potential losses for the firm. Therefore, securities firms are typically subject to significant interest rate and market risk.

Question 5

Trades created by institutional orders that are carried out away from central exchanges are called dark pools.

Accepted Answer

Dark pools refer to private exchanges or trading venues where institutional investors can trade large blocks of securities away from public exchanges.

Question 6

As of 2015,equity capital in the securities industry measured over 12 percent.

Accepted Answer

The statement is false. According to the Financial Industry Regulatory Authority (FINRA), as of 2015, equity capital in the securities industry measured around 6 percent.

Question 7

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

Accepted Answer

Investment banking activity and performance are heavily dependent on the overall health and growth of the economy. During economic expansions, there is usually increased corporate activity such as mergers and acquisitions, initial public offerings, and debt issuances, which generate business for investment banks. Conversely, during economic recessions, there is a decrease in corporate activity and a decline in the demand for investment banking services. Therefore, activity and performance trends in the investment banking industry are highly correlated with general economic expansions and recessions.

Question 8

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

Accepted Answer

Underwriting issues of new securities is a key area of activity for an investment bank specializing in the commercial side of the business. This involves helping companies raise capital by issuing new securities and selling them to investors.

Question 9

Securities firms and investment banks engage in as many as seven key activity areas.

Accepted Answer

Securities firms and investment banks typically engage in activities such as underwriting and distributing securities, providing investment advice, trading securities, managing assets, financing corporate activities, and providing other financial services such as mergers and acquisitions advisory.

Question 10

The largest source of funding for securities firms and investment banks as an industry is repurchase agreements.

Accepted Answer

Repurchase agreements, also known as repos, are a common form of short-term borrowing used by securities firms and investment banks. These agreements involve the sale of securities by the borrower to the lender, with an agreement to repurchase the securities at a later date at a slightly higher price. This provides liquidity for the borrower, while providing a relatively low-risk form of investment for the lender. Repurchase agreements are a key source of funding for the industry.

Question 11

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.

Accepted Answer

According to various industry reports and analyses, the trading profits from fixed income securities and the growth in new issue underwriting were indeed the principal factors behind the increased profitability of the securities industry in the mid-1990s.

Question 12

By 2015,there were approximately ________ securities firms and investment banks operating.

Accepted Answer

The answer of By 2015,there were approximately ________ securities firms...

Question 13

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

Accepted Answer

Broker-dealers typically assist in the trading of existing securities, buying and selling securities on behalf of clients or for their own accounts. While some broker-dealers may also assist in the underwriting and distribution of new securities (choice D), this is not as typical. Choice A and C are incorrect because broker-dealers do not usually assist in the underwriting or issuing of securities.

Question 14

Which of the following differentiates securities firms from investment banks?

Accepted Answer

Securities firms and investment banks both operate in the financial market, but they differ in their functions. Securities firms are involved in buying and selling existing securities, and they provide clients with brokerage services, research and advice on investments. Investment banks, on the other hand, specialize in underwriting new securities and facilitating the issuance of debt and equity securities. Investment banks also provide advisory services on mergers and acquisitions, restructurings, and other corporate finance transactions. Therefore, the correct option that differentiates securities firms from investment banks is B, as securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.

Question 15

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

Accepted Answer

This statement is true as more and more securities firms and investment banks are expanding their reach by forming partnerships with firms in other countries in order to tap into new markets and gain a competitive advantage.

Question 16

Securities firms and investment banks are more involved internationally than other member of the financial services industry.

Accepted Answer

Securities firms and investment banks often engage in cross-border transactions and operations, making them more involved internationally than other types of financial institutions.

Question 17

Which of the following is true of private placement of securities?

Accepted Answer

Private placement of securities involves selling securities to a small number of large institutional investors, rather than to the investing public. This type of sale is exempt from registration with the SEC and does not allow public trading in the securities. Private placement typically involves selling securities at higher prices than those offered in public markets.

Question 18

Which of the following is true?

Accepted Answer

In a best-efforts underwriting, investment bankers earn fees based on the success of their placements, as they do not guarantee the sale of the securities and act as agents rather than principals.

Question 19

As of 2015,45 percent of all stock trades in the U.S.occurred through dark pools.

Accepted Answer

As of 2015, it was estimated that around 15-20% of all stock trades in the U.S. occurred through dark pools, not 45%. Dark pools are private exchanges for trading securities that are not accessible by the investing public.

Question 20

Discount brokers

Accepted Answer

Discount brokers conduct trades for customers but do not offer investment advice. They typically offer lower commission rates compared to full-service brokers, but customers are expected to make their own investment decisions.

Quiz 4: Financial Services: Securities Firms and Investment Banks