Question 1

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

Accepted Answer

Private placements involve the sale of securities to a limited number of pre-selected investors, typically institutional investors. Investment bankers may provide advice on the evaluation of prospective buyers and the terms of sale for private placements, but they are not involved in public offerings. Private placements may involve either stocks or bonds. While some private placements may be sold to government entities, it is not accurate to say that more than half are sold to governments or government agencies.

Question 2

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 3

Only individual investors participate in public offerings,while institutional investors participate in private placements.

Accepted Answer

Institutional investors can also participate in public offerings, while private placements can also be made to individual investors. The statement is not entirely accurate.

Question 4

Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable.

Accepted Answer

Registration of securities by the SEC does not indicate that the risk of those securities is reasonable. It only indicates that the issuer has complied with the disclosure requirements set by the SEC. Investors still need to do their own research and assess the risks associated with the securities before investing.

Question 5

Preferred stock is traded in the money market,while common stock is traded in the capital market.

Accepted Answer

Preferred stock and common stock are both traded in the capital market, not in the money market. The money market typically deals with short-term debt securities, such as Treasury bills and commercial paper, while the capital market deals with longer-term securities, such as stocks and bonds.

Question 6

The investment banker performs what three basic functions?

Accepted Answer

The investment banker primarily performs three basic functions which are underwriting, distributing, and advising. Underwriting involves helping companies by purchasing securities from them which are later sold to investors. Distributing involves selling these securities to investors in the market. Advising involves providing consultation services to companies for issues related to securities offerings, mergers and acquisitions, and other financial matters.

Question 7

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 guarantees the corporation a pre-determined price for the securities.

Question 8

In a private placement,the securities are offered and sold to a limited number of investors.

Accepted Answer

In a private placement, the securities are offered and sold to a limited number of investors, usually institutional investors or accredited investors. This is in contrast to a public offering where the securities are sold to the general public.

Question 9

Activities of the investment banker include

Accepted Answer

Investment bankers assume the risk of selling a security issue and therefore need to provide advice to firms issuing securities. They also sell new securities to the ultimate investors. Therefore, all of the choices (A, B, and C) are correct.

Question 10

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 bank agrees to sell as many shares as possible but does not guarantee to sell all of them. In this case, Goldman Sachs sold 4.5 million shares out of the 5 million offered by Spandra, and returned the remaining shares to Spandra.

Question 11

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, they assume the risk of purchasing the securities from the issuing firm and then reselling them to investors. This means that if the securities do not sell for the anticipated price, the investment banking firm will incur a loss. The issuing firm is essentially transferring the risk of selling the securities to the underwriter.

Question 12

Private placements are

Accepted Answer

The answer of Private placements are
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Question 13

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

Accepted Answer

In a Dutch auction, investors submit bids stating how many shares they would like to buy and at what price. The process involves gradually lowering the price until the demand matches the number of shares being offered, at which point the shares are sold to the highest bidders at the clearing price. Google used a Dutch auction to sell its shares to the public in 2004.

Question 14

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

Accepted Answer

The investment banker may act as an adviser in a best efforts offering but does not underwrite the securities. Best efforts means the investment banker will use best effort to sell the securities but does not guarantee the sale of the securities. All the other options involve underwriting securities.

Question 15

Commercial banks that also provide investment banking services are called

Accepted Answer

Universal banks are commercial banks that offer a range of financial services including traditional banking services (deposits, loans, etc.) as well as investment banking services (underwriting, financial advisory, trading, etc.). Therefore, they are also known as "one-stop shops" for all banking and financial needs.

Question 16

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

Accepted Answer

Private placements for debt do not require a registration statement with the SEC, which reduces costs from investment-banking underwriting fees and distribution costs. This makes private placements a more cost-effective option compared to public debt issuance.

Question 17

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, such as JPMorgan Chase, Goldman Sachs, and Bank of America Merrill Lynch. Stand-alone investment banking firms used to be more prevalent, but many have either merged with larger banks or gone out of business. The top five banks involved in investment banking account for a significant portion of the industry's total market share. The financial crisis did lead to some consolidation in the industry, but overall, it remains dominated by large banks.

Question 18

The process of shelf-registration is beneficial to the issuing firm because it will reduce the time needed for the firm to take an issue to market.

Accepted Answer

Shelf-registration allows an issuing firm to file registration paperwork with the Securities and Exchange Commission (SEC) before they plan to sell securities, which allows them to sell the securities quickly when the opportunity arises. This can reduce the time needed for the firm to take an issue to market.

Question 19

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 because common stocks are considered riskier investments, which can lead to higher underwriting fees and other associated costs.

Question 20

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.

Quiz 2: The Financial Markets and Interest Rates