978-0134083285 Chapter 2 Part 2

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51) The telecommunications system that provides a national information linkup among brokers and

dealers operating in the over-the-counter market is called

A) NCIS.

B) NSQA.

C) NASDAQ.

D) NASQ.

Keywords: NASDAQ, Over-the-Counter Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

52) Insurance companies invest in the “long-end” of the securities market by purchasing securities with

longer maturities. In which of the following instruments would an insurance company be least likely to

invest most of its assets?

A) corporate stocks

B) corporate bonds

C) mortgages

D) commercial paper

Keywords: Money Market, Commercial Paper

Learning Obj.: L.O. 2.1

AACSB: Analytical Thinking

53) Which of the following refers to all institutions and procedures that provide for transactions in short–

term debt instruments generally issued by borrowers with very high credit ratings?

A) capital market

B) commercial banks

C) money market

D) stock market

Keywords: Money Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

54) Which of the following is NOT a benefit provided by the existence of organized security exchanges?

A) providing a continuous market

B) establishing and publicizing fair security prices

C) helping businesses raise new capital

D) standardization of all debt agreements

Keywords: Organized Security Exchange

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

55) In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76

billion. This is an example of

A) a primary market transaction.

B) a secondary market transaction.

C) a venture capital firm transaction.

D) a money-market transaction.

Keywords: Primary Market, Capital Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

56) Money-market transactions include which of the following?

A) any security that is paid for with cash

B) 30-year U.S. Treasury bonds

C) all securities paid for with the proceeds of a money-market account

D) securities that have a maturity of less than one year

Keywords: Money Market

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

57) Capital market transactions include which of the following?

A) any security that is purchased from a brokerage firm that is well capitalized

B) common stock of a public corporation

C) all securities that are purchased in the open market

D) U.S. Treasury bills

Keywords: Capital Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

58) Prices of securities that are traded on the organized exchanges are determined by

A) a “bid” and “ask” negotiation process amongst brokers who hold these securities in their own account.

B) the Securities Exchange Commission.

C) a continuous auction process reflecting the sentiments of buyers and sellers.

D) the sellers of the securities.

Keywords: Security Pricing, Continuous Auction Process, Organized Security Exchange

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

59) Prices of securities that are traded in the Over-the-Counter Markets are determined by

A) the Federal Trade Commission.

B) a continuous modified auction process.

C) the buyers of these securities.

D) a “bid” and “ask” negotiation process of broker-dealers of these securities.

Keywords: Over-the-Counter Market, Security Pricing, Negotiation Process

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

60) The Securities and Exchange Commission (SEC)

A) regulates only initial public offerings, or IPOs.

B) regulates only primary market transactions to ensure investors are provided with adequate and

accurate information on new securities.

C) regulates both primary and secondary markets.

D) regulates initial public offerings, but not seasoned equity offerings, in the primary market.

Keywords: SEC, Securities and Exchange Commission, Regulation

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

61) The New York Stock Exchange (NYSE) is

A) an automated electronic trading platform.

B) an auction market with face-to-face trading on the floor of the stock exchange in addition to

automated, electronic trading.

C) a hybrid market, allowing for face-to-face trading on the floor of the stock exchange in addition to

automated, electronic trading.

D) primarily a futures market.

Keywords: New York Stock Exchange, NYSE

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

62) Explain the difference between (a) public offerings and private placements, (b) primary markets and

secondary markets, (c) the money market and the capital market, and (d) organized security exchanges

and over-the-counter markets.

Keywords: Capital Markets

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

63) Name the benefits derived from the existence of stock exchanges.

Keywords: Organized Stock Exchanges

Learning Obj.: L.O. 2.1

AACSB: Reflective Thinking

Learning Objective 2.2

1) The difference between the price the corporation gets and the public offering price is called the broker-

dealer spread.

Keywords: Investment Banker, Broker-Dealer, Spread

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

2) The need for extensive regulation of investment banking firms is limited due to the highly competitive

nature of that industry.

Keywords: Investment Banking, Concentration

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

3) The investment banker performs three basic functions: (1) underwriting, (2) distributing, and (3)

advising.

Keywords: Investment Banker

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

4) The negotiated purchase is the most prevalent method of securities distribution in the private sector.

Keywords: Negotiated Purchase, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

5) When the corporation sells securities directly to the investment public without involving an investment

banker, it is called a privileged subscription.

Keywords: Privileged Subscription, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

6) An investment banker assumes underwriting risk in both negotiated purchases and privileged

subscriptions with standby agreements.

Keywords: Negotiated Purchase, Standby Agreements, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

7) Investment banking firms are prohibited from selling securities due to conflicts of interest.

Keywords: Investment Banker

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

8) The syndicate can be thought of as a wholesaler of securities and the dealer organization as a retailer of

securities.

Keywords: Syndicate, Dealer Organization, Securities

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

9) A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Keywords: Syndicate, Investment Bankers

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

10) It is common practice among the largest corporations to sell their securities directly to investors.

Keywords: Securities, Direct Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

11) The investment banker prefers to avoid a negotiated purchase because it tends to be the least

profitable arrangement for the investment banker.

Keywords: Negotiated Purchase, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

12) The competitive bid purchase is largely confined to railroad, public utility, and municipal bond

issues.

Keywords: Competitive Bid Purchase

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

13) The bid price is the price that a dealer will pay for a security; the asked price is the price at which she

will sell a security.

Keywords: Bid Price, Asked Price, Securities

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

14) Because they occur in private, stricter regulations are placed on the private placement of securities.

Keywords: Private Placements, Securities

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

15) The investment banking business is dominated by a few very large, stand-alone investment banking

firms.

Keywords: Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

16) Only individual investors participate in public offerings, while institutional investors participate in

private placements.

Keywords: Public Offering, Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

17) Preferred stock is traded in the money market, while common stock is traded in the capital market.

Keywords: Money Markets, Capital Markets

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

18) In a private placement, the securities are offered and sold to a limited number of investors.

Keywords: Private Placements, Securities

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

19) The provisions of the Sarbanes-Oxley Act of 2002, or SOX, apply to all U.S.-based corporations, as

well as to foreign corporations conducting business in U.S. markets.

Keywords: Sarbanes-Oxley, SOX

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

20) When a company repurchases its own common stock, it is likely that

A) the stock price will increase because the company views the stock as undervalued.

B) the stock price will decrease because the company is creating artificial demand for its stock.

C) the stock price will remain the same as this is simply an internal transaction.

D) the board of directors will be fired for incompetence.

Keywords: Common Stock, Share Repurchase

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

21) Investment firms, such as Goldman Sachs, assist the transfer of capital by

A) facilitating indirect transfers from savers (investing public) to borrowers (corporations needing

capital).

B) selling indirect securities to savers and using the funds to buy common stock for corporations needing

funds.

C) selling direct securities.

D) selling common stock for corporate clients in the secondary market.

Keywords: Investment Banker, Capital Transfer

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

22) A corporation sells securities to an investment banking firm on January 1st. The next day an

international oil crisis causes stock prices to drop dramatically. The corporation is immune from the drop

in price of its stock due to which function of the investment banking firm?

A) hedging

B) distributing

C) reinsurance

D) underwriting

Keywords: Investment Banker, Underwriting

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

23) If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the

following distribution methods?

A) competitive bid purchase

B) privileged subscription with no standby agreement

C) commission or best-efforts contract

D) direct sale

Keywords: Investment Banking, Competitive Bid Purchase

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

24) Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of

stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an

example of a

A) privileged subscription.

B) standby agreement.

C) negotiated purchase.

D) commission or best-efforts agreement.

Keywords: Negotiated Purchase, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

25) Spandra Electronics wants to raise money by selling stock. After talking to several investment

banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock.

Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of

A) a privileged subscription with a standby agreement.

B) a commission or best-efforts agreement.

C) a privileged subscription with a standby agreement.

D) a competitive bid purchase.

Keywords: Commission or Best-Efforts Agreement, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

26) Activities of the investment banker include

A) assuming the risk of selling a security issue.

B) selling new securities to the ultimate investors.

C) providing advice to firms issuing securities.

D) all of the above

Keywords: Investment Banker

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

27) The investment banker does NOT underwrite the securities to be issued in which of the following?

A) initial public offering

B) primary market transaction

C) firm commitment

D) best efforts

Keywords: Investment Banker, Underwriting, Best Efforts

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

28) Which of the following relationships is true regarding the costs of issuing the following securities?

A) common stock > bonds > preferred stock

B) preferred stock > common stock > bonds

C) bonds > common stock > preferred stock

D) common stock > preferred stock > bonds

Keywords: Cost of Capital, Securities, Common Stock, Preferred Stock, Bonds

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

29) Which of the following statements about investment banking in the United States is MOST correct?

A) Investing banking is dominated by a few, very large, stand-alone investment banking firms, such as

Bear Stearns.

B) The investment banking industry is dominated by large banks that are also investment bankers.

C) The top five banks involved in investment banking account for less than 25% of the industry’s total

market share.

D) The investment banking industry became more competitive following the financial crisis in 2007 and

2008.

Keywords: Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

30) The investment banker performs what three basic functions?

A) underwriting, distributing, and regulating

B) underwriting, advising, and price-pegging

C) underwriting, distributing, and advising

D) underwriting, distributing, and negotiating

Keywords: Investment Banker

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

31) When an investment banking firm “underwrites” an issue of securities, the firm is performing which

of the following?

A) agreeing to market the securities to investors for a fee

B) giving legal advice to the firm that is issuing the securities

C) offering to purchase the securities from the firm, thereby assuming the risk of resale to investors

D) agreeing to provide insurance that the firm’s securities will sell for a price that is established by the

firm

Keywords: Investment Banker, Underwriting

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

32) Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways.

Which of the following methods guarantees the corporation with a pre-determined price for the

securities?

A) a best efforts basis

B) a commission basis

C) a competitive bid

D) an underwriting

Keywords: Investment Banker, Underwriting

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking