Deck 4: Securities, Brokerage, and Investment Banking

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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 8

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

Question 9

In order to realize a return on their investment, venture capital firms sell their equity interest in the company.

Question 10

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

Question 11

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

Question 12

The revision of the Bank Act and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms since 1987.

Question 13

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

Question 14

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

Question 15

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.

Question 16

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

Question 17

National integrated investment firms provide business services to both retail and corporate customers.

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

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

Question 20

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

Question 21

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 22

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

Question 23

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)Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis; and with best-efforts underwriting, investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.

Question 24

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 25

The Canadian Investor Protection Fund (CIPF) protects investors against losses of up to $1,000,000 caused by the failure of a securities firm.

Question 26

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

Question 27

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

Question 28

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 29

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 these.

Question 30

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 31

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

Question 32

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 33

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

Question 34

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 35

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

Question 36

The goal of the U.S. Sarbanes-Oxley Act is to prevent deceptive accounting and management practices and thus to increase confidence in corporate governance.

Question 37

As of 2012, equity capital in the securities industry measured over 12 percent.

Question 38

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

Question 39

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

Question 40

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

Question 41

The largest category of assets for broker-dealers in 2013 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 42

The dominant form of institutional venture capital firms operate as

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

Question 43

Which of the following is NOT a back-office service function in the securities industry?

A)Correspondent banking services.
B)Escrow services.
C)Clearance of securities transactions.
D)Research services.
E)Services related to settlement of securities transactions.

Question 44

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)effect 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 45

Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of

A)investing.
B)merger and acquisitions.
C)market making.
D)investment banking.
E)trading.

Question 46

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 these.

Question 47

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 48

The process of providing custody and escrow services, clearance and settlement services, and research and other advisory services by a securities firm involves the function of

A)mergers and acquisitions.
B)market making.
C)investment banking.
D)back-office functions.
E)cash management services.

Question 49

In market-making

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

Question 50

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)They 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 on publicly registered issues.

Question 51

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)buying 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 52

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 53

In comparison to a typical 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 54

Creating a secondary market in an asset by a securities firm involves the function of

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

Question 55

The largest category of liabilities of broker-dealers in 2013 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.

Question 56

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 57

Integrated investment and brokerage 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)may specialize more in corporate finance with high activity in trading securities.
D)All of these.
E)may specialize in providing service to both retail and corporate customers, and may specialize more in corporate finance with high activity in trading securities.

Question 58

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 these.

Question 59

The market-making function of investment banking can be described as

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

Question 60

Offering bank deposit-like accounts to individual customers by a securities firm involves

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

Question 61

The U.S.A. Patriot Act requires financial services firms operating in the United States to

A)verify the identity of any person seeking to open an account.
B)maintain records of the information used to verify a person's identity.
C)determine whether a person opening an account is on a list of suspected terrorists.
D)All of these.
E)verify the identity of any person seeking to open an account, and determine whether a person opening an account is on a list of suspected terrorists.

Question 62

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold. What is the profit to the investment banker it sells 8 million shares for $9.75 per share?

A)Profit of $1,000,000.
B)Loss of $7,500,000.
C)Profit of $7,000,000.
D)Loss of $7,000,000.
E)Profit of $1,800,000.

Question 63

Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to

A)research and other advisory services.
B)custody and escrow services.
C)clearance and settlement services.
D)banking services.
E)back office services.

Question 64

An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. If the investment bank can sell the shares for $9.75 per share, how much money does TWResearch receive?

A)$105,000,000.
B)$150,000,000.
C)$112,000,000.
D)$125,000,000.
E)$110,000,000.

Question 65

The Canadian Investor Protection Fund (CIPF) protects investors against losses of up to ____ on securities firm failures.

A)$100,000
B)$200,000
C)$500,000
D)$1,000,000
E)$25,000,000

Question 66

One of the primary reasons that U.S. investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that

A)their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.
B)the industry had acquired too much capital during the previous decade.
C)bank holding companies needed the ability to underwrite new issues of corporate securities.
D)it was the only way an investment bank could qualify for federal bailout funds.
E)the U.S. Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies.

Question 67

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold. If the investment bank sells 8 million shares for $9.75 per share, how much money does Rochester Industries receive?

A)$76,200,000.
B)$84,000,000.
C)$105,000,000.
D)$82,200,000.
E)$78,000,000.

Question 68

Which of the following two U.S. investment banks were granted approval to be chartered as commercial banks during the most recent financial crisis?

A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.

Question 69

Securities firms have equity ratios that are lower than those for banks because their balance sheets contain a larger portion of

A)illiquid assets.
B)current liabilities.
C)long term liabilities.
D)fixed assets.
E)liquid assets.

Question 70

Which of the following 2 U.S. firms survived as investment banks following the most recent financial crisis?

A)Morgan Stanley and Bear Stearns.
B)Goldman Sachs and Merrill Lynch.
C)Lehman Brothers and Morgan Stanley.
D)Merrill Lynch and Lehman Brothers.
E)None of these.

Question 71

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold. How much money does Rochester Industries receive?

A)$15,000,000.
B)$84,000,000.
C)$76,200,000.
D)$82,200,000.
E)$110,000,000.

Question 72

An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called

A)risk arbitrage.
B)an agency transaction.
C)best efforts underwriting.
D)pure arbitrage.
E)a principal transaction.

Question 73

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold. If the investment bank were able to sell all 10 million shares for $12.75 per share, how much money does Rochester Industries receive?

A)$127,500,000.
B)$125,250,000.
C)$105,675,000.
D)$102,000,000.
E)$99,000,000.

Question 74

An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. How much money does TWResearch receive?

A)$105,000,000.
B)$150,000,000.
C)$112,000,000.
D)$125,000,000.
E)$110,000,000.

Question 75

Which of the following U.S. investment banks is no longer in business as a result of the most recent financial crisis?

A)Morgan Stanley.
B)Bear Stearns.
C)Lehman Brothers.
D)Goldman Sachs.
E)Merrill Lynch.

Question 76

Program trading involves

A)online trading services provided to customers by electronic trading securities firms.
B)computer-driven buying or selling of baskets of 15 or more stocks by institutional traders.
C)purchase and sale of assets that are potentially but not necessarily equivalent.
D)buying blocks of securities in anticipation of some information release.
E)providing a platform for customers to trade without the use of a broker.

Question 77

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold. What is the profit to the investment banker if it is able to sell 8 million shares for $10.50 per share?

A)Profit of $1,000,000.
B)Loss of $7,500,000.
C)Profit of $7,000,000.
D)Loss of $7,000,000.
E)Profit of $1,800,000.

Question 78

An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. What is the profit (loss) to the investment banker?

A)Profit of $1,000,000.
B)Profit of $2,000,000.
C)Profit of $7,000,000.
D)Loss of $7,500,000.
E)Loss of $1,000,000.

Question 79

An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to the investment banker?

A)Profit of $1,000,000.
B)Loss of $7,500,000.
C)Profit of $7,000,000.
D)Loss of $7,000,000.
E)Loss of $1,000,000.

Question 80

Which of the following two U.S. investment banks were acquired by financial services holding companies during the most recent financial crisis?

A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.