Financial Markets and Institutions, 8e (Mishkin)
1) An investment bank is a financial institution that
A) bundles small deposits into larger loans.
B) helps corporations raise funds.
C) holds most of its assets in commercial paper.
D) does all of the above.
E) does only A and B of the above.
2) In a ________, new issues of a security are sold to buyers by the corporation or government
agency ultimately using the funds.
A) primary market
B) secondary market
C) capital market
D) money market
3) In a ________, a security is sold between investors, and does not (necessarily) involve the
corporation or government agency ultimately using the funds.
A) primary market
B) secondary market
C) capital market
D) money market
4) The Glass-Steagall Act
A) separated commercial and investment banking.
B) made it illegal for a commercial bank to buy or sell securities on behalf of its customers.
C) made it illegal for investment banks to engage in the underwriting of corporate securities.
D) did all of the above.
E) did only A and B of the above.
5) During the Depression, about ________ banks failed (about 40% of all commercial banks).
A) 500
B) 1,000
C) 5,000
D) 10,000
6) Investment banks sell ________ securities to the public, and brokerage firms sell ________
securities to the public.
A) new; existing
B) new and existing; existing
C) existing; new
D) existing; new and existing
7) The primary function of investment banks is
A) the bundling of deposits into loans.
B) extending long-term credit to other financial institutions.
C) helping corporations raise funds.
D) providing credit to firms engaged in international trade.
8) The primary function of investment banks is to
A) extend credit to stock brokers and dealers.
B) extend credit to investors.
C) extend credit to corporations.
D) help corporations issue new securities.
9) Which is not an activity of investment banks?
A) Underwriting new issues of corporate stocks and bonds
B) Acting as deal makers in mergers
C) Acting as intermediaries in the buying and selling of businesses or parts of businesses
D) Underwriting new issues of federal government bonds
10) Tasks that investment bankers perform when acting as underwriters to sell securities to the
public include
A) pricing the security.
B) preparing the filings required by the Securities and Exchange Commission.
C) arranging for the security to be rated.
D) all of the above.
E) only A and B of the above.
11) Investment banks find it less difficult to price securities if the firm has prior issues currently
selling in the market, called ________.
A) secondary issues
B) seasoned issues
C) outstanding issues
D) experienced issues
12) The process of underwriting a stock or bond issue requires that the investment bank
A) assure investors that the issue will provide them a high return.
B) purchase the entire issue at a predetermined price if the quantity demanded by consumers is
insufficient at the predetermined price.
C) purchase the entire issue at a predetermined price and then resell it in the market.
D) do both A and B of the above.
13) The registration statement the securities underwriter files with the SEC contains information
about
A) the firm’s financial condition, management, competition, industry, and experience.
B) how the funds will be used.
C) management’s assessment of the risk of the securities.
D) all of the above.
E) only A and B of the above.
14) SEC registration is
A) required for all securities.
B) required if less than $1.5 million in securities are issued per year.
C) not required for securities that are sold through a private placement.
D) required if the securities mature in less than one year.
E) not required if securities are underwritten by a reputable investment bank.
15) By law, investors must be given a portion of the registration statement before they can invest
in a new security. This document is called a ________.
A) prospectus
B) proxy statement
C) fiduciary warrant
D) debenture
16) Investment banks advertise upcoming securities offerings with block ads in the Wall Street
Journal. Such an ad is called a ________.
A) tombstone
B) marker
C) prospectus
D) registration statement
17) Most investment banks are attached to
A) large commercial banks.
B) large brokerage houses.
C) finance companies.
D) large nonfinancial corporations.
18) From an investment banker’s perspective, the best outcome occurs when a new issue is
________.
A) undersubscribed
B) fully subscribed
C) oversubscribed
D) syndicated
19) Investment banks may lose ________ if new securities issues are ________.
A) large amounts of money; oversubscribed
B) large amounts of money; fully subscribed
C) future business; oversubscribed
D) future business; undersubscribed
20) The largest U.S. underwriter of global debt and equity issues, as of 2009, was ________.
A) Merrill Lynch
B) J.P. Morgan
C) Morgan Stanley
D) Goldman Sachs
21) Often investment bankers will form a group, each one buying only a portion of the new
securities to be issued. Such a group is called an underwriting ________.
A) alliance
B) syndicate
C) association
D) guild
22) In a ________ agreement, the investment banker makes no guarantee regarding the price the
issuing firm will receive, but agrees to sell the securities on a commission basis.
A) best efforts
B) brokered
C) private-placement
D) jump-start
23) Under best efforts underwriting, the underwriter
A) pays for the entire security issue.
B) sells the security on a commission basis.
C) spreads the risk among different brokerage houses.
D) makes a special appeal to the Securities and Exchange Commission to delay the issue.
24) Private placements
A) do not require the services of investment bankers.
B) need not be registered with the SEC.
C) are more common in the sale of stocks than for bonds.
D) all of the above.
E) are only A and B of the above.
25) The most active investment banking firm in the private placement market is ________.
A) Merrill Lynch
B) Lehman Brothers
C) Goldman Sachs
D) Morgan Stanley
26) The buyers of private placement issues are most likely to be ________.
A) insurance companies
B) pension funds
C) investment banks
D) all of the above
E) only A and B of the above
27) The buyers of private placement securities are most likely to be ________.
A) insurance companies
B) pension funds and mutual funds
C) commercial banks
D) all of the above
E) only A and B of the above
28) Which of the following statements about private placements are true?
A) Private placements are more common for the sale of bonds than for stocks.
B) Investment bankers, though not required for a private placement, often facilitate the
transaction.
C) Investment bankers help the issuing firm file the paperwork required by the SEC.
D) All of the above are true.
E) Only A and B of the above are true.
29) Investment bankers have been active in the mergers and acquisitions market since the 1960s.
Their contributions have included
A) helping firms that want to acquire another firm locate a firm to pursue.
B) helping would-be acquirers solicit shareholders through a tender offer.
C) helping target firms ward off undesired takeover attempts.
D) all of the above.
E) only A and B of the above.
30) Which of the following is not a step in the process by which an investment bank assists in the
sale of a company or corporate division?
A) Preparation of a confidential memorandum
B) Negotiation of a letter of intent
C) Preparation of a definitive agreement
D) Forming a syndicate of purchasers
31) The best known investment banker involved in mergers and acquisitions, credited with
inventing the junk bond market, is ________.
A) Ivan Boesky
B) Michael Milken
C) James Garner
D) Michael Douglas
32) ________ perform their main function in the primary market for securities and ________
perform their main function in the secondary market.
A) Investment banks; securities brokers and dealers
B) Securities brokers and dealers; investment banks
C) Securities brokers; securities dealers
D) Securities dealers; securities brokers
33) The securities sales, the ________ price is the price that the broker pays for securities they
buy for their inventory.
A) bid
B) ask
C) midpoint
D) transaction
34) The securities sales, the ________ price is the price that the broker receive when they sell the
securities.
A) bid
B) ask
C) midpoint
D) transaction
35) In a primary market, ________ sell new issues of securities; in a secondary market,
________ assist in trading previously issued securities.
A) securities dealers; securities brokers
B) securities brokers; securities dealers
C) investment banks; securities brokers and dealers
D) securities brokers and dealers; investment banks
36) Which of the following best explains the difference between brokers and dealers?
A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given
prices.
B) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given
prices.
C) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their
inventories of securities; brokers stand ready to buy and sell from their inventories of securities.
D) There is no difference between brokers and dealers.
37) Securities dealers
A) hold inventories of securities, which they sell to customers who want to buy.
B) hold securities that they have purchased from customers who wanted to sell.
C) are called market takers, as they have significantly cut into the market that brokers used to
dominate.
D) do all of the above.
E) do only A and B of the above.
38) Securities dealers
A) sell securities out of their inventories to customers who want to buy.
B) buy securities, which they add to their inventories, from customers who want to sell.
C) are largely responsible for the health and growth of small businesses in the United States.
D) do all of the above.
E) do only A and B of the above.
39) By making a market in thinly traded stocks, securities dealers solve the ________ trading
problem, which is of particular benefit to ________ businesses.
A) synchronous; large
B) synchronous; small
C) nonsynchronous; large
D) nonsynchronous; small
40) Which of the following is not a service securities brokers offer their clients?
A) Holding customers’ stock for safekeeping
B) Providing insurance against loss of the securities
C) Providing insurance against loss of value of the securities
D) Extending margin credit
41) An instruction to a securities agent to buy or sell the security at the current market price is
called a ________.
A) limit order
B) market order
C) stop loss order
D) margin order
42) An instruction to a securities agent to sell a stock when it reaches a specific price is a
________.
A) short sell
B) market order
C) limit order
D) stop loss order