43) An instruction to a securities agent to purchase a stock as long as its price does not exceed a
specified level is a ________.
A) short sell
B) market order
C) limit order
D) stop loss order
44) To take advantage of anticipated stock price decreases, an investor would use ________.
A) a market order
B) a limit order
C) a short sell
D) margin credit
45) Which of the following statements about cash management accounts (CMAs) are true?
A) The cash management account was developed in 1977 by Merrill Lynch.
B) The advantage of brokerage-based cash management accounts is that they make it easier to
buy and sell securities.
C) As a result of CMAs, the distinction between banking activities and the activities of nonbank
financial institutions has become more clearly defined.
D) All of the above are true.
E) Only A and B of the above are true.
46) The largest full-service broker is ________ with about 17,000 financial advisors and $2.2
trillion in client assets.
A) Bank of America Merrill Lynch
B) Charles Schwab Corp.
C) Ameritrade
D) Smith Barney
47) A full-service broker offers its clients all of the following except
A) execution of trades on request.
B) low transaction fees.
C) research and investment advice.
D) development of long-term customer relationships.
48) An investment pool is formed to
A) manipulate the market by spreading false rumors.
B) lower brokerage fees by combining security purchases.
C) share investment advice among member investors.
D) take advantage of tax breaks introduced by the 1933 and 1934 securities acts.
49) A securities dealer stands ready to make a market in the security at any time. For this reason,
dealers are also called ________.
A) market makers
B) “brokers and dealers”
C) liquidity traders
D) demand dealers
50) If an investment is liquid, it can be sold ________.
A) quickly
B) anonymously
C) only on “rainy” days
D) through a full-service broker
51) A ________ is a specialized firm that finances young, start-up companies.
A) venture capital firm
B) finance company
C) small-business finance company
D) capital-creation company
52) Which of the following provides funds to companies not yet ready to sell securities to the
public?
A) Investment banks
B) Securities brokers and dealers
C) Venture capital firms
D) None of the above
53) The first true venture capital firm was ________, established in 1946 by MIT president Karl
Compton and local business leaders.
A) American Research & Development (ARD)
B) Charles River Development
C) Redsocks Capital
D) the MIT Fund
54) Which of the following is the first phase in the life cycle of a venture capital deal?
A) A limited partnership is formed and funds are raised.
B) Funds are invested in start-up companies.
C) The venture firm exits the investment.
D) The venture firm seeks approval from the S.E.C.
55) Which of the following is the second phase in the life cycle of a venture capital deal?
A) A limited partnership is formed and funds are raised.
B) Funds are invested in start-up companies.
C) The venture firm exits the investment.
D) The venture firm seeks approval from the S.E.C.
56) Which of the following is the third and final phase in the life cycle of a venture capital deal?
A) A limited partnership is formed and funds are raised.
B) Funds are invested in start-up companies.
C) The venture firm exits the investment.
D) The venture firm seeks approval from the S.E.C.
57) Venture capital firms are usually organized as ________.
A) closed-end mutual funds
B) limited partnerships
C) corporations
D) nonprofit businesses
58) Which of the following is not a characteristic feature of venture capital firms?
A) Funding just one or a small number of firms
B) Holding equity in the firms that are funded
C) Having a long-term investment horizon
D) Providing advice and assistance to the firms that are funded
59) Which of the following is a characteristic feature of venture capital firms?
A) Developing a portfolio of companies
B) Holding debt in the firms that are funded
C) Allowing firms to use the funds as they see fit
D) Having a short-term investment horizon
60) The sources of venture capital funding have
A) shifted from wealthy individuals to pension funds and corporations.
B) shifted from pension funds and corporations to wealthy individuals.
C) decreased since 1990.
D) done none of the above.
61) A typical venture capital firm has a ________ number of investors who each contribute a
________ amount of money to the fund.
A) large; small
B) small; large
C) large; large
D) small; small
62) Which of the following statements about venture capital funding is not correct?
A) Exiting an investment can occur through an initial public offering or by merger or acquisition.
B) Venture capital investing is highly risky.
C) Venture capital firms may focus on a limited geographic area or on specific industries to
facilitate monitoring their investments.
D) Firms hope to exit a start-up firm in 3-5 years.
63) The 20-year average return of venture capital firms has been about ________.
A) 56%
B) 8%
C) 24%
D) 102%
64) Since the stock market decline in 2000, the number of companies funded and the total funds
invested by venture capital firms have ________.
A) held steady
B) declined
C) increased slightly
D) increased sharply
65) The ________ of the volume handled by brokers and dealers is in the publicly held
securities.
A) vast majority
B) low percentage
C) total amount
D) none of the above
66) With private investing,
A) capital is raised by selling securities to the public.
B) capital is raised by issuing new shares of stock.
C) a limited partnership is formed that raises money from a small number of high-wealth
investors.
D) all of the above occur
67) Which of the following is an advantage to a private equity buyout?
A) They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act.
B) The CEOs frequently have more time and flexibility to enact changes need to turn around
subpar companies.
C) Both A and B.
D) Neither A nor B.
68) When taking a particular course of action for a private equity firm, the CEO of a privately
held company needs to convince ________ that it is a good decision.
A) the shareholders
B) the managing partners
C) no one
D) both A and B
69) There are ________ risk and ________ returns to investors in private equity buyouts.
A) high; low
B) low; high
C) high; high
D) low; low
70) Which of the following is a description of a public firm acquired by a private equity
investment?
A) Public shares are retired.
B) A public company goes private.
C) The firm is no longer subject to controls and oversight required of publicly held companies.
D) All of the above are correct.
1) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on
behalf of its customers.
2) When a firm issues stock for the first time in an initial public offering, it is difficult for an
investment bank to determine what the correct price should be.
3) To help raise the money to finance railroad expansions, J. P. Morgan’s father resided in
London and sold Morgan railroad securities to European investors.
4) An undersubscribed issue occurs when sales agents have been unable to generate sufficient
interest among their customers to sell all the securities by the issue date.
5) Investment banks form syndicates to reduce the risk involved in selling new securities.
6) Resisted takeovers are called hostile.
7) Private placements are more common for the sale of stocks than for bonds.
8) Investment bankers perform a number of tasks required to sell securities to the public, among
them pricing the security, preparing the filings required by the SEC, arranging for the security to
be rated, and marketing the security through their contacts with brokerage houses.
9) One disadvantage of the private placement of securities issues is the high cost of registering
the issue.
10) Junk bonds are high-risk, high-return equity securities that were used primarily to finance
takeover attempts.
11) The Securities Acts Amendment of 1975 abolished fixed commissions.
12) An investment pool is formed to manipulate the market for a stock by spreading false rumors
about the health of the firm.
13) Venture capital firms reduce risk by investing in only a few companies which can be
carefully monitored and nurtured.
14) Investors in venture capital firms expect to profit quickly from their investment.
19
15) An additional perk of a private equity firm is that the profits for both CEOs and the partners
are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income
was received as income.
16) In a typical private equity buyout, a partnership is formed and private equity investors are
contacted to pledge participation.
17) Within the broad universe of private equity sectors, the two most common are venture funds
and capital buyouts.
1) Explain how rulings by the courts and regulators have made the markets served by both
commercial and investment banks more competitive.
Topic: Chapter 22.4 Relationship Between Securities Firms and Commercial Banks
Question Status: Previous Edition
2) Discuss the difference between full-service and discount brokers.
Topic: Chapter 22.2 Securities Brokers and Dealers
Question Status: New Question
3) What services do investment bankers provide for firms that are issuing new securities?
Topic: Chapter 22.1 Investment Banks
Question Status: Previous Edition
4) What is underwriting?
Topic: Chapter 22.1 Investment Banks
Question Status: Previous Edition
5) How do best efforts agreements and private placements differ from the usual process of
underwriting new securities issues?
Topic: Chapter 22.1 Investment Banks
Question Status: Previous Edition
6) Explain why private placements of securities are an attractive way of raising funds for some
firms.
Topic: Chapter 22.1 Investment Banks
Question Status: Previous Edition
20
7) Describe the differences between securities brokers and securities dealers.
Topic: Chapter 22.2 Securities Brokers and Dealers
Question Status: Previous Edition
8) What niche in the financial system do venture capital firms fill?
Topic: Chapter 22.5 Private Equity Investment
Question Status: Previous Edition
9) Discuss some of the abuses in the market prior to the passage of the securities acts in 1933 and
1934.
Topic: Chapter 22.3 Regulation of Securities Firms
Question Status: New Question
10) How do venture capital firms overcome the problem of information asymmetries that
accompany start-up firms?
Topic: Chapter 22.5 Private Equity Investment
Question Status: Previous Edition
11) What is the difference between a venture fund and a capital buyout?
Topic: Chapter 22.5 Private Equity Investment
Question Status: New Question
12) Discuss the several ways in which venture capitalists reduce asymmetric information.
Topic: Chapter 22.5 Private Equity Investment
Question Status: New Question
13) Discuss the advantages of a private equity buyout.
Topic: Chapter 22.6 Private Equity Buyouts
Question Status: Previous Edition
14) Discuss the life cycle of a equity buyout.
Topic: Chapter 22.7 Life Cycle of the Private Equity Buyout
Question Status: Previous Edition
15) What ultimately happened to Webvan, the Internet grocer that received more than $1 billion
in venture financing.
Topic: Chapter 22.6 Private Equity Buyouts
Question Status: New Question