Question 1

The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their staffs.

Accepted Answer

Non-brokerage firms entering the brokerage area means more competition for traditional securities firms, which may lead them to expand their staff to keep up with the demand.

Question 2

The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.

Accepted Answer

The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, which dated back to the Depression Era of the 1930s.

Question 3

When a new issue of bonds is sold, all the proceeds go to the owners of the company.

Accepted Answer

When a new issue of bonds is sold, the proceeds go to the bondholders who have purchased the bonds. The issuing company receives the funds from the sale of the bonds but must use them to pay back the bondholders with interest over time.

Question 4

Smaller investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.

Accepted Answer

Smaller investment banking houses may not have the resources to guarantee the success of a distribution, so they may handle it on a "best-efforts" basis.

Question 5

The investment banker is someone who buys large new issues of stocks and then sells them to the public after the stock price has risen.

Accepted Answer

The investment banker is another type of financial intermediary (see Chapter 14), linking people with funds to those who require them.

Question 6

The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.

Accepted Answer

Investment bankers continue to play increasingly diverse roles as financial intermediaries.

Question 7

When the stock market is rising and high, companies hold off on the issue of new common stock.

Accepted Answer

When the stock market is rising and high, more companies try to time their offering to take advantage of the high demand for common stock.

Question 8

The year 2008 will likely go down in history as one of the worst environments for companies wishing to go public.

Accepted Answer

According to various sources, including Forbes and Bloomberg, the year 2008 was a challenging time for companies seeking to go public due to the global financial crisis and economic downturn.

Question 9

The period of market stabilization usually lasts two or three days after the initial offering, but may extend up to 30 days for difficult-to-distribute securities.

Accepted Answer

This statement is true. The period of market stabilization typically lasts for a few days after the initial offering, but for securities that are difficult to distribute, the period may extend up to 30 days.

Question 10

Large well-established investment bankers often distribute new issues on a best-efforts basis.

Accepted Answer

A "best efforts" approach is most commonly used by smaller investment banking concerns.

Question 11

Investment banking has changed from a very competitive, price-sensitive environment to one where relationships determine who gets the business.

Accepted Answer

The expanding level of competition has created a more price sensitive environment.

Question 12

Among several other roles, as a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public.

Accepted Answer

Investment bankers act as intermediaries between companies seeking to raise capital and investors looking for investment opportunities. One of their primary roles is to structure, underwrite, and distribute securities offerings to the public.

Question 13

Over 51 percent of the total revenue made through investment banking was generated by just 10 global banking firms.

Accepted Answer

This statement is true. According to a report by Coalition, a data analytics firm, in 2019, the top 10 investment banking companies generated over 51 percent of the revenue made by the entire investment banking industry.

Question 14

The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking operations and their investment banking operations into two different entities.

Accepted Answer

The Glass-Steagall Act of the 1930s did require U.S. banks to separate their commercial banking operations and their investment banking operations into two different entities through the establishment of a firewall between them.

Question 15

The term "underwriter" is synonymous with risk-taker or risk-bearer.

Accepted Answer

An underwriter assumes the risk of issuing securities or insurance policies, and therefore acts as a risk-taker or risk-bearer.

Question 16

The Glass-Steagall Act of the 1930s was created to separate U.S. bank's commercial and investment sections, which later because an advantage to the U.S. banks because foreign banks were affected by having them combined.

Accepted Answer

The Glass-Steagall Act was indeed created to separate commercial and investment banking in the U.S., but the advantage or disadvantage relative to foreign banks was not a primary consideration or clear outcome of the Act. The main goal was to prevent the kinds of banking practices that contributed to the 1929 stock market crash and ensuing Great Depression.

Question 17

An investment banker acts as a middleman between a corporation needing funds and investors with funds.

Accepted Answer

Investment bankers play the role of intermediaries between corporations in need of financing and investors looking to invest their funds. They help companies raise funds through the issuance and sale of securities such as stocks and bonds.

Question 18

The entire area of investment banking is becoming more competitive.

Accepted Answer

With the rise of digital platforms and new players entering the market, the investment banking industry is becoming increasingly competitive. Old practices and traditional business models are being challenged, and companies are adapting to keep up with the changing landscape.

Question 19

In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.

Accepted Answer

Investment banking houses often engage in both underwriting and dealer-broker functions, although some may specialize in one or the other. The dealer-broker function involves buying and selling securities for client accounts and managing a securities inventory for trading purposes.

Question 20

Only a small amount of security issues are sold on a "best-efforts" basis.

Accepted Answer

In a "best-efforts" basis, the underwriter does not guarantee the sale of the securities, which is less common compared to firm commitment underwriting where the underwriter buys all the securities and resells them.

Quiz 15: Investment Banking: Public and Private Placement