Deck 4: Financial Services: Securities Brokerage and Investment Banking

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

The top ten underwriters of global debt and equity issues represent over 80 percent of the industry total.

Question 6

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 7

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

Question 8

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 9

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

Question 10

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

Question 11

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 12

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 13

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 14

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

Question 15

As of 2012, there were over 4,900 securities firms in operation.

Question 16

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

Question 17

As of the first half of 2009, income generated by securities brokerage accounted for over 65% of commercial bank holding company fee income.

Question 18

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

Question 19

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

Question 20

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 21

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 22

The change to decimalization of stock market transactions has lead to an increase in income from the market making activity of investment banks and securities firms.

Question 23

Cash management accounts did not exist before 1999.

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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 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

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

Question 32

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

Question 33

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

Question 34

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

Question 35

Decimalization involves making quotes in the equities markets in units of 1 cent ($0.01) rather than in units of one-eights of a dollar ($0.125).

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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)Answers A and C only.
E)Answers B and C only.

Question 43

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 by the SEC on publicly registered issues.

Question 44

By 2012, there were approximately ________ securities firms and investment banks operating.

A)9,100
B)7,600
C)1,200
D)480
E)220

Question 45

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 46

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 above.

Question 47

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

Question 48

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 49

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 50

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)Answers B and C only.

Question 51

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 52

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

Question 53

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

Question 54

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 above.

Question 55

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 56

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 57

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 above.

Question 58

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 59

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)Answers A and C only.
E)Answers B and C only.

Question 60

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 61

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 62

The largest category of assets for broker-dealers as of the beginning of 2012 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 63

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 64

Legislation designed to improve corporate governance practices, especially as they relate to accounting practices, is the

A)National Securities Markets Improvement Act of 1996.
B)Sarbanes-Oxley Act.
C)U.S.A.Patriot Act.
D)Financial Services Modernization Act of 1999.
E)Bank Holding Company Act.

Question 65

National full-line 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 the above.
E)Answers A and C only.

Question 66

The largest category of liabilities of broker-dealers as of the beginning of 2012 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 67

The Securities Investor Protection Corporation (SIPC) 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 68

Identify a major reason behind the increase in domestic underwriting activity during the 1990s.

A)Enhanced non-trading profits.
B)High long-term interest rates.
C)Low long-term dividend rates.
D)Growth in the asset-backed securities market.
E)Decreased securitization of debt.

Question 69

The primary advantage to the investor of a brokerage 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.
E)Regulation Q interest rate ceilings do not apply to CMAs.

Question 70

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 71

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 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

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 74

Securities firms have equity ratios that are lower than those for commercial 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 75

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 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.
E)cash management services.

Question 77

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 78

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 79

According to SEC Rule 415,

A)larger corporations can register their new issues with the SEC up to two years in advance.
B)firms should disclose soft dollar arrangements to their clients.
C)large investors are allowed to begin trading privately placed securities among themselves.
D)firms are required to maintain records of the information used to verify the identity of a person opening an account.
E)publicly held companies must disclose all material information that might affect investment decisions to all investors at the same time.

Question 80

The U.S.A. Patriot Act requires financial services firms 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 the above.
E)Answers A and C only.