Deck 4: Financial Services: Securities Firms and Investment Banks

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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 8

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

Question 9

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

Question 10

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

Question 11

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 12

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

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

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 15

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 16

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 17

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

Question 18

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

Question 19

As of 2015,income generated by securities brokerage accounted for over 25% of commercial bank holding company fee income.

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

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

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

Question 30

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

Question 31

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 32

Cash management accounts did not exist before 1999.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

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 42

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.

Question 43

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

Question 44

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 45

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

Question 46

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

Question 47

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

Question 48

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.

Question 49

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

Question 50

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

Question 51

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 52

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

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

Question 53

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.

Question 54

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.

Question 55

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

Question 56

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

Question 57

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.

Question 58

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.

Question 59

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

Question 60

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.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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.

Question 66

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.

Question 67

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.

Question 68

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.

Question 69

The primary advantage to the investor of a securities firm cash management account (CMA)over commercial bank deposit accounts is that

A)no FDIC insurance is required on CMAs.
B)no regulatory oversight of CMAs.
C)they make it easier to buy and sell securities using funds from the CMA.
D)CMAs guarantee higher rates of return than money market deposit accounts.

Question 70

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 71

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.

Question 72

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.

Question 73

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.

Question 74

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.

Question 75

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.

Question 76

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.

Question 77

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.

Question 78

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.

Question 79

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.

Question 80

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.