Question 1

The investment banker performs what three basic functions?

Accepted Answer

The investment banker performs the basic functions of underwriting, distributing, and advising. Underwriting refers to the process of guaranteeing a certain amount of money for a company's securities, distributing refers to the selling of those securities to investors, and advising refers to providing guidance to the company on financial matters such as mergers and acquisitions.

Question 2

Which of the following relationships is true regarding the costs of issuing the following securities?

Accepted Answer

Issuing common stock often involves higher costs due to underwriting fees, legal fees, and the dilution of existing shares, making it generally more expensive than issuing preferred stock or bonds. Preferred stock issuance costs are typically higher than bonds due to higher coupon rates and the need to make the stock attractive to investors, but lower than common stock due to less dilution and fewer legal complexities. Bonds are usually the cheapest to issue because they involve lower interest rates and are secured, making them less risky for investors.

Question 3

Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways.Which of the following methods guarantees the corporation with a pre-determined price for the securities?

Accepted Answer

An underwriting is a method in which the investment banking firm guarantees the corporation with a pre-determined price for the securities. This means that the investment bank will purchase the securities from the corporation at a fixed price and then resell them to the public, thereby assuming the risk of any unsold securities.

Question 4

If a corporation wants a guarantee that all of its shares of stock will be sold,it should use which of the following distribution methods?

Accepted Answer

A competitive bid purchase guarantees that all shares will be sold because potential buyers compete to purchase the shares at the highest price, ensuring that all shares are sold.

Question 5

A "Dutch auction" was used by Google to raise money in 2004.A Dutch auction involves

Accepted Answer

A Dutch auction involves allowing investors to submit bids saying how many shares they'd like to buy and at what price. This is exactly what Google did in 2004 to raise money.

Question 6

Investment firms,such as Goldman Sachs,assist the transfer of capital by

Accepted Answer

Investment firms like Goldman Sachs play the role of a middleman by facilitating indirect transfers of capital from savers to borrowers. They do not sell direct securities or common stock in the primary or secondary market.

Question 7

Reynolds,Inc.needs to raise $5 million by selling common stock.Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs,who then is responsible for selling the shares to investors.This is an example of a

Accepted Answer

This is an example of a negotiated purchase, where Reynolds, Inc. directly sells a specific number of shares at a set price to Goldman Sachs, who then takes on the responsibility of selling these shares to investors. This contrasts with other methods such as a best-efforts agreement where the intermediary would sell shares without guaranteeing the total amount raised.

Question 8

A corporation sells securities to an investment banking firm on January 1^st.The next day an international oil crisis causes stock prices to drop dramatically.The corporation is immune from the drop in price of its stock due to which function of the investment banking firm?

Accepted Answer

The investment banking firm acted as an underwriter for the corporation, which means that it purchased the securities from the corporation and then sold them to investors. In this process, the investment banking firm typically takes on some of the risk of the securities not selling or decreasing in value. Therefore, the investment banking firm would have purchased the securities from the corporation at a specific price, and would have been responsible for reselling those securities to investors at a higher price. This means that the investment banking firm would have assumed some of the risks associated with the sale of those securities, including the risk that the value of the securities would decrease. As an underwriter, the investment banking firm may have used various techniques, such as hedging, to limit the risk associated with the sale of the securities, but ultimately the investment banking firm is responsible for any losses due to a decrease in value.

Question 9

Which of the following is an advantage of using private placements for debt?

Accepted Answer

Private placements for debt can reduce costs because the registration statement for the SEC, investment-banking underwriting fees, and distribution costs can be eliminated.

Question 10

Private placements are

Accepted Answer

The answer of Private placements are
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Question 11

Commercial banks that also provide investment banking services are called

Accepted Answer

Universal banks provide a wide range of financial services including commercial banking, investment banking, and other financial services. They are also known as full-service banks or financial supermarkets.

Question 12

When an investment banking firm "underwrites" an issue of securities,the firm is performing which of the following?

Accepted Answer

When an investment banking firm "underwrites" an issue of securities, it offers to purchase the securities from the issuing firm, assuming the risk of resale to investors. In other words, the investment banking firm guarantees the sale of the securities, and takes on the risk of any unsold securities. This allows the issuing firm to receive immediate cash from the sale of their securities without having to worry about the market demand. The investment banking firm earns a fee for assuming this risk.

Question 13

The provisions of the Sarbanes-Oxley Act of 2002,or SOX,apply to all U.S.-based corporations,as well as to foreign corporations conducting business in U.S.markets.

Accepted Answer

The answer of The provisions of the Sarbanes-Oxley Act of...

Question 14

Spandra Electronics wants to raise money by selling stock.After talking to several investment banking firms,Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock.Goldman sells 4.5 million shares and returns the rest to Spandra.This is an example of

Accepted Answer

This is an example of a commission or best-efforts agreement, where the investment banking firm agrees to use its best efforts to sell the stock and earns a commission on the shares sold. The fact that only 4.5 million shares were sold suggests that the firm did not guarantee the sale of all 5 million shares (as in a privileged subscription with a standby agreement) or bid on the stock themselves (as in a competitive bid purchase).

Question 15

The investment banker does NOT underwrite the securities to be issued in which of the following?

Accepted Answer

The investment banker does not underwrite the securities in a best efforts offering. In a best efforts offering, the investment banker agrees to use its best efforts to sell the securities but does not guarantee that all the securities will be sold.

Question 16

When a company repurchases its own common stock,it is likely that

Accepted Answer

When a company repurchases its own stock, it is an indication that the company believes its stock is undervalued. This can have a positive impact on the stock price because it signals to the market that the company has confidence in its own future success.

Question 17

Which of the following statements is MOST correct concerning flotation costs?

Accepted Answer

Flotation costs are typically higher for common stocks than for preferred stocks and bonds. This is because issuing common stock often involves more risk and uncertainty, leading to higher underwriting fees and commissions. Common stocks represent ownership in a company and come with voting rights, making their issuance more complex and potentially riskier than bonds or preferred stocks, which are debt instruments or carry fixed dividends.

Question 18

Which of the following statements about investment banking in the United States is MOST correct?

Accepted Answer

The investment banking industry in the United States is dominated by large banks that are also investment bankers. These banks include JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America, and Wells Fargo. This trend has continued for several years, with these banks holding a significant market share in investment banking.

Question 19

Which of the following statements concerning private placements is MOST correct?

Accepted Answer

Private placements are securities offerings that are not registered with the SEC and are therefore not available to the general public. While investment bankers may not be directly involved in the sale of the securities, they may still provide advice on the terms of the sale and the evaluation of potential buyers. Private placements may involve both stocks and bonds, and while government entities may be buyers, they do not make up more than half of all private placements.

Question 20

Activities of the investment banker include

Accepted Answer

Investment bankers assume the risk of selling a security issue, sell newly issued securities to ultimate investors, and provide advice to firms issuing securities. Therefore, all of these activities are included in the role of an investment banker.

Quiz 2: The Financial Markets and Interest Rates