Deck 4: Financial Services: Securities Brokerage and Investment Banking

Question 1

Recently (2013-2015), pre-tax profits at securities firms and investment banks have been declining because of new regulation.

Answer 1

True

Question 2

Because the business of funds management generates fees based on the size of the pool of assets managed, the flow of income is more volatile than either investment banking function or the trading function.

Answer 2

False

Question 3

Investment banks specialize in the origination, underwriting, and distribution of new securities issued by corporations or governments.

Answer 3

True

Question 4

The Financial Services Modernization Act of 1999 and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms.

Question 5

As of October 1987, there were over 9,500 securities firms and investment banks.

Question 6

The top ten underwriters of global debt and equity issues represent over 70 percent of the industry total in 2015.

Question 7

Generally, commission income for securities firms tends to increase as stock markets increase in value and decline when stock markets decline.

Question 8

Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring.

Question 9

As of 20015, income generated by securities brokerage accounted for over 25% of commercial bank holding company fee income.

Question 10

Initial public offerings (IPOs) are first-time issues of firms whose equity has not previously traded in an organized market.

Question 11

The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987.

Question 12

Since the recent financial crisis, the securities and investment banking industry has been expanding and adding new lines of business.

Question 13

The objective of the investing function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark.

Question 14

As of 2015, there were over 4,500 securities firms in operation.

Question 15

The value of assets is the traditional measure of size in the securities brokerage and investment banking industry.

Question 16

National full-line investment banks and securities firms provide business services to both retail and corporate customers.

Question 17

The number of investment banks and securities firms expanded rapidly from 1980 to October 1987.

Question 18

In a public offering of a new security, an investment banker places a new issue of securities with a handful of private, usually large, investors.

Question 19

Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.

Question 20

Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.

Question 21

Principal transactions allow the market maker to always make a profit regardless of whether the market price for a specific stock is rising or falling.

Question 22

As compared to venture capital firms, private equity firms specialize in assisting existing companies that have proven themselves in their industry.

Question 23

Competition from internet-based and electronic exchanges has led to a decrease in profits of market making.

Question 24

A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering.

Question 25

The Financial Services Modernization Act of 1999 allowed investment banks and securities firms to offer deposit accounts to individuals.

Question 26

Market making involves creating a primary market in a financial asset.

Question 27

Agency transactions of market makers are two-way transactions on behalf of customers

Question 28

Over the last 10 years, the number of floor traders on the NYSE has remained relatively the same.

Question 29

Venture capital firms often make loans to finance new and often high-risk companies that may have no business history.

Question 30

Market makers in an NYSE stock are obligated to buy shares from sellers even when the market for the stock is declining.

Question 31

An angel venture capitalist is likely to be a wealthy individual that makes equity investments in unsuccessful, bankrupt firms.

Question 32

Recent trends indicate that securities firms are increasingly focused on providing client services and downsizing proprietary trading products and services.

Question 33

When conducting a firm commitment offering, the investment bank is acting as an agent on behalf of the issuing company or government.

Question 34

Cash management accounts were an early attempt by commercial banks to provide investment banking services to individuals.

Question 35

Investment banks are forbidden to offer traditional bank services including making small business loans and the trading of loans.

Question 36

Electronic brokerage allows an investor to have direct access to the trading floor.

Question 37

Cash management accounts did not exist before 1999.

Question 38

In pure arbitrage, a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price.

Question 39

In order to realize a return on their investment, venture capital firms eventually sell their equity interest in a company they helped to fund.

Question 40

In order for an investment bank to perform a firm commitment offering of securities, they must maintain at least 20% equity on their balance sheet.

Question 41

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

Question 42

A securities issue placed with one or a few large institutional investors is called an IPO.

Question 43

In a private offering, the investment banker acts as a private placement agent for a fee, placing securities with one or a few institutional investors such as life insurance companies.

Question 44

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

Question 45

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

Question 46

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

Question 47

Boutique investment banks specialize in originating, underwriting, and distributing issues of new securities.

Question 48

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

Question 49

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

Question 50

Discount brokers are stockbrokers that conduct trades for customers but do not offer investment advice.

Question 51

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

Question 52

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

Question 53

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

Question 54

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.

Question 55

Which of the following are not one of the main types of trading activities?

A)position trading.
B)pure arbitrage
C)risk arbitrage
D)card trading
E)electronic brokering

Question 56

Full-line firms such as Bank of America Merrill Lynch are generally called bulge-bracket investment banks.

Question 57

Asset managers sometimes prefer dark pools to exchanges because orders remain hidden until they are executed, which can help investors get a better price on large trades.

Question 58

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.

Question 59

The role of a broker-dealer is to assist in the issue of new securities where as an underwriter's role is to assist in the trading of existing securities.

Question 60

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

Question 61

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

A)They assist in underwriting of new securities.
B)They assist in trading of existing securities.
C)They assist in issuing new securities.
D)They assist in underwriting and distribution of new securities.
E)All of the options.

Question 62

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

A)Securities are placed with few large institutional investors.
B)Securities of private firms are sold to the investing public at lower prices.
C)The securities must be registered with the SEC.
D)Public trading in these securities is not allowed.
E)Subject to more stringent disclosure and informational requirements than those imposed by the SEC on publicly registered issues.

Question 63

The management of pools of assets by securities firms is considered to be the function of

A)market making.
B)investment banking.
C)trading.
D)investing.
E)cash management.

Question 64

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

A)9,100
B)7,600
C)1,200
D)4,400
E)220

Question 65

Which of the following differentiates securities firms from investment banks?

A)Securities firms are concerned with the commercial side of the business while investment banks are concerned with the retail side of the business.
B)Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.
C)Securities firms underwrite new issues of securities while investment banks provide brokerage services.
D)Securities firms originate new issues of securities and investment banks underwrite the securities.
E)Securities firms are concerned with private placements of securities whereas investment banks are concerned with publicly traded securities.

Question 66

The largest category of assets for securities firms as of 2015 was

A)receivables from other broker-dealers.
B)securities purchased under agreement to resell.
C)receivables from customers.
D)exchange membership.
E)long position in securities and commodities.

Question 67

In comparison to a typical commercial bank, an investment bank is likely to have

A)lower levels of capital.
B)higher reliance on long-term debt.
C)lower levels of repurchase agreements.
D)higher levels of net interest margin.
E)higher levels of loans to customers.

Question 68

Which of the following is true?

A)Investment bankers earn fees based on the success of their placements when they underwrite using a best-efforts basis.
B)Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis.
C)With best-efforts underwriting, investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.
D)An investment banker is acting as an agent when conducting a firm-commitment offering of securities.
E)None of the options is correct.

Question 69

Discount brokers

A)are securities firms focused on providing research support for customers.
B)conduct trades for customers but do not offer investment advice.
C)allow customers to receive investment advice at very low rates.
D)complete trades for customers on- or offline while offering investment advice.
E)are electronic trading securities firms that allow customers to trade without the use of a broker.

Question 70

A corporate venture capital firm

A)has publicly-traded common stock.
B)provides equity funds to companies that already have publicly traded common stock.
C)is a subsidiary of a nonfinancial corporation.
D)provides debt funding to only to established corporations.
E)is subject to more stringent disclosure requirements than other venture capital firms.

Question 71

Which of the following is NOT considered a trading activity of securities firms?

A)Position trading.
B)Pure arbitrage.
C)Liquidity trading.
D)Risk arbitrage trading.
E)Program trading.

Question 72

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

A)Purchase of existing securities.
B)Sale of securities in the secondary market.
C)Brokerage of existing securities.
D)Underwriting issues of new securities.
E)All of the options.

Question 73

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

A)total asset value.
B)total equity.
C)total debt.
D)annual sales.
E)annual profits.

Question 74

Venture capital firms assess two major issues when deciding to invest in a company.Which of the following indicates these issues?

A)Company management and other funding secured by the company.
B)A proven company track record and the risk-return tradeoff of an investment.
C)Potential for a high return on investment and an easy exit strategy.
D)Funding requested and company financial statements.
E)Company's potential to generate profits and the funds available to the venture capital company.

Question 75

National full-line investment and securities firms

A)may specialize in providing service to both retail and corporate customers.
B)usually serve only as discount brokers without offering investment advice.
C)specialize more in corporate finance with very low activity in trading securities.
D)are more highly regulated than smaller firms.
E)are those owned by commercial banks.

Question 76

The dominant form of institutional venture capital firms operate as a

A)Corporation.
B)Subsidiary of a financial company.
C)Bank holding company.
D)Limited partnership.
E)General partnership.

Question 77

In market-making

A)principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission.
B)principal transactions when market makers take long or short positions and seek profits on price movements.
C)market makers take inventory positions to stabilize the market in the securities.
D)principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission and principal transactions when market makers take long or short positions and seek profits on price movements.
E)principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission and market makers take inventory positions to stabilize the market in the securities.

Question 78

The function of institutional venture capital firms is to

A)find and fund the most promising new firms.
B)lend funds on a long-term basis to promising new companies with no track record.
C)take equity positions in successful established companies.
D)lend funds to established companies that are faltering.
E)none of the options is correct.

Question 79

Pure arbitrage trading involves

A)buying blocks of securities in anticipation of some information release.
B)purchase of stock in a company being acquired and the sale of stock in the acquiring company.
C)exploitation of a difference between a company's current value and its estimated liquidation value.
D)purchasing an asset in one market at one price and selling it immediately in another market at a higher price.
E)simultaneous purchase and sale of similar shares in a single market.

Question 80

The largest category of liabilities of securities firms as of 2015 was

A)bank loans payable.
B)securities sold under repurchase agreements.
C)payables to customers.
D)short positions in securities and commodities.
E)payables to non-customers.