Question 1

Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms are called

Accepted Answer

A) top-tier bankers. 
B) Section 20 affiliates. 
C) venture capital firms. 
D) ECNs. 
E) discount brokerage houses. 
A) top-tier bankers. 
B) Section 20 affiliates. 
C) venture capital firms. 
D) ECNs. 
E) discount brokerage houses. C

Question 2

________ are examples of investment bankers offering traditional commercial banking services.

Accepted Answer

A) Online brokers 
B) Cash management accounts 
C) Underwriting corporate debt and equity offers 
D) Venture capital funds 
E) Mergers and acquisition services 
A) Online brokers 
B) Cash management accounts 
C) Underwriting corporate debt and equity offers 
D) Venture capital funds 
E) Mergers and acquisition services B

Question 3

Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

Accepted Answer

A) True 
 B)False  False

Question 4

If an underwriter overestimates the demand for a firm's securities in a firm commitment offering,the underwriter can

Accepted Answer

A) sell the shares back to the issuing firm at a discount. 
B) lower the bid price to the issuing firm. 
C) increase the fees charged to the issuing firm. 
D) cancel the issue and refund the fees paid by the issuing firm. 
E) None of these options are correct. 
A) sell the shares back to the issuing firm at a discount. 
B) lower the bid price to the issuing firm. 
C) increase the fees charged to the issuing firm. 
D) cancel the issue and refund the fees paid by the issuing firm. 
E) None of these options are correct.

Question 5

Brokerage commission income and stock market valuations tend to move inversely in most years,including in 2010.

Accepted Answer

A) True 
 B)False

Question 6

Describe an agency transaction (brokerage)and a principal transaction (dealer)that is involved in trading. What determines profits in each activity? Which is riskier?

Accepted Answer

Market makers act as an agent by process

Question 7

For securities firms,income from investment management is more stable than income from underwriting or trading activities.

Accepted Answer

A) True 
 B)False

Question 8

The largest liability of broker-dealers in 2015 was

Accepted Answer

A) bank loans payable. 
B) short positions in securities and commodities. 
C) subordinated debt. 
D) repurchase agreements. 
E) equity. 
A) bank loans payable. 
B) short positions in securities and commodities. 
C) subordinated debt. 
D) repurchase agreements. 
E) equity.

Question 9

Diversified full-line securities firms engage in all but which one of the following?

Accepted Answer

A) Trading and brokerage of existing securities 
B) Corporate restructuring and advice 
C) Issuing new securities 
D) Raising money via insured deposits 
A) Trading and brokerage of existing securities 
B) Corporate restructuring and advice 
C) Issuing new securities 
D) Raising money via insured deposits

Question 10

An investment banker agrees to a firm commitment offering of 1.2 million shares of Bally stock. The offer price is set at $25.50 and the spread is 30 cents per share. If the stock is actually sold to the public at $26.00,however,what is the amount of funds Bally receives? (Ignore any other fees or expenses.)

Accepted Answer

A) $31,200,000 
B) $30,600,000 
C) $30,240,000 
D) $29,280,000 
E) $28,120,000 
A) $31,200,000 
B) $30,600,000 
C) $30,240,000 
D) $29,280,000 
E) $28,120,000

Question 11

Darby Minerals wants to hire an investment banker to sell two million shares of stock to the public. Darby is considering using either a firm commitment or a best efforts offering.
(a)If Darby goes with a firm commitment,the offer price will be $15.00 per share and the spread will be 25 cents a share and all two million shares will be sold. The actual sale price to the public is $14.55.
(b)Suppose that Darby uses a best efforts offering. The actual sale price to the public is again $14.55 and the investment banker charges 4 cents per share sold as commission. Assume that in the best efforts offer only 1.85 million shares can be sold.
What are the proceeds to Darby from the sale of stock in the firm commitment and the best efforts and what is the investment banker's gain or loss in each case? Ignore any other costs and expenses.

Accepted Answer

(a)Firm Commitment Option: Firm Proceeds

Question 12

Why is capital a more important measure of the size of a securities firm than the amount of assets? What other measures would be useful,given the diversity of this industry?

Accepted Answer

The size of investment banking and secur

Question 13

Security dealers who will buy or sell securities at any time in the market are called:

Accepted Answer

A) Brokers 
B) Program traders 
C) Underwriters 
D) Market makers 
E) Dealers 
A) Brokers 
B) Program traders 
C) Underwriters 
D) Market makers 
E) Dealers

Question 14

You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a gain. This is an example of

Accepted Answer

A) position trading. 
B) program trading. 
C) risk arbitrage. 
D) pure arbitrage. 
E) hedging. 
A) position trading. 
B) program trading. 
C) risk arbitrage. 
D) pure arbitrage. 
E) hedging.

Question 15

The largest asset on the typical broker-dealers' balance sheet in 2015 was

Accepted Answer

A) receivables from other broker-dealers. 
B) long positions in securities and commodities. 
C) reverse repurchase agreements. 
D) repurchase agreements. 
E) cash. 
A) receivables from other broker-dealers. 
B) long positions in securities and commodities. 
C) reverse repurchase agreements. 
D) repurchase agreements. 
E) cash.

Question 16

Although an investor can write checks on a cash management account held with a broker,regulations prevent the use of ATMs or debit cards on these accounts.

Accepted Answer

A) True 
 B)False

Question 17

A best efforts offering is one in which

Accepted Answer

A) the underwriter bears the risk of an unsuccessful offering. 
B) the bid-ask spread is exceptionally high,but the investment banker does his best to sell the issue anyway. 
C) the investment banker acts as a principal for the issuer. 
D) the investment banker acts only as a distribution agent. 
E) the issue can only be privately placed. 
A) the underwriter bears the risk of an unsuccessful offering. 
B) the bid-ask spread is exceptionally high,but the investment banker does his best to sell the issue anyway. 
C) the investment banker acts as a principal for the issuer. 
D) the investment banker acts only as a distribution agent. 
E) the issue can only be privately placed.

Question 18

When the investment banker sells the new securities on commission without guaranteeing the sale of the whole issue,the process is called:

Accepted Answer

A) Private placement 
B) Best effort 
C) Brokered sale 
D) Underwriting 
E) Syndicate offering 
A) Private placement 
B) Best effort 
C) Brokered sale 
D) Underwriting 
E) Syndicate offering

Question 19

An investment bank agrees to underwrite a $100 million,15-year,10 percent semiannual bond issue for a company on a firm commitment basis. The investment bank pays the company on Monday and plans to begin a public sale on Tuesday. If interest rates rise 0.5 percent,or fifty basis points,overnight,what will be the impact on the profits of the investment bank?

Accepted Answer

A) $4,258,365; loss 
B) $4,258,365; gain 
C) $3,735,975; loss 
D) $3,735,975; gain 
E) $1,239,175; gain 
A) $4,258,365; loss 
B) $4,258,365; gain 
C) $3,735,975; loss 
D) $3,735,975; gain 
E) $1,239,175; gain

Question 20

The trading activity involving purchases of large blocks of securities on the expectation of a favorable price move over the next several weeks or months is called

Accepted Answer

A) program trading. 
B) pure arbitrage. 
C) day trading. 
D) position trading. 
E) hedging. 
A) program trading. 
B) pure arbitrage. 
C) day trading. 
D) position trading. 
E) hedging.

Exam 16: Securities Firms and Investment Banks

Investment firms that pool money from individuals and/or institutions and invest equity funds in start-up firms are called

________ are examples of investment bankers offering traditional commercial banking services.

Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

If an underwriter overestimates the demand for a firm's securities in a firm commitment offering,the underwriter can

Brokerage commission income and stock market valuations tend to move inversely in most years,including in 2010.

Describe an agency transaction (brokerage)and a principal transaction (dealer)that is involved in trading. What determines profits in each activity? Which is riskier?

For securities firms,income from investment management is more stable than income from underwriting or trading activities.

The largest liability of broker-dealers in 2015 was

Diversified full-line securities firms engage in all but which one of the following?

Why is capital a more important measure of the size of a securities firm than the amount of assets? What other measures would be useful,given the diversity of this industry?

Security dealers who will buy or sell securities at any time in the market are called:

You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a gain. This is an example of

The largest asset on the typical broker-dealers' balance sheet in 2015 was

Although an investor can write checks on a cash management account held with a broker,regulations prevent the use of ATMs or debit cards on these accounts.

A best efforts offering is one in which

When the investment banker sells the new securities on commission without guaranteeing the sale of the whole issue,the process is called:

The trading activity involving purchases of large blocks of securities on the expectation of a favorable price move over the next several weeks or months is called

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

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