978-0134083285 Chapter 2 Part 3

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33) A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction involves

A) selling bonds in Europe.

B) allowing investors to submit bids saying how many shares they‘d like to buy and at what price.

C) allowing investment banking firms to submit bids on how many shares they are willing to sell and at

what price.

D) hiring a Dutch firm to sell a company’s securities at auction.

Keywords: Dutch Auction, Google

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

34) Commercial banks that also provide investment banking services are called

A) conglomerate banks.

B) multi-purpose banks.

C) investment enhanced banks.

D) universal banks.

Keywords: Universal Banks, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

35) Which of the following statements concerning private placements is MOST correct?

A) Private placements do not involve investment bankers.

B) Although not selling the securities to the public, investment bankers may provide advice on the

evaluation of prospective buyers and the terms of sale for private placements.

C) Private placements are limited to stocks, not bonds.

D) More than half of all private placements are sold to federal, state, or local governments or government

agencies.

Keywords: Private Placement, Investment Banking

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

36) Which of the following is an advantage of using private placements for debt?

A) reduced costs from the elimination of the registration statement for the SEC, investment-banking

underwriting fees and distribution costs

B) lower interest costs

C) fewer and less burdensome restrictive covenants

D) the possibility of future SEC registration

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

37) Which of the following statements is MOST correct concerning flotation costs?

A) Flotation costs are the same for common stock, preferred stock and bonds because they reflect mainly

printing costs and legal fees.

B) Flotation costs are generally higher for bonds rather than stocks because the dollar amounts involved

are much higher, allowing for economies of scale.

C) Flotation costs as a percentage of gross proceeds increase as the size of the security issue increases.

D) Flotation costs are higher for common stocks than for preferred stocks and bonds due to the higher

level of risk associated with owning common stock.

Keywords: Flotation Costs

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

38) Private placements are

A) limited to debt securities.

B) limited to equity securities.

C) available for both debt and equity securities, but the market is dominated by equity issues.

D) especially appealing to new, small, and medium-sized companies.

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

39) All of the following are typically advantages of private placements EXCEPT

A) speed.

B) reduced flotation costs.

C) financial flexibility.

D) the possibility of future SEC registration.

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

40) Advantages of private placements do NOT include which of the following?

A) more financing flexibility

B) lower flotation costs

C) investor protection through extensive regulation

D) funds which are available more quickly than through a public offering

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

41) Private placements usually have several advantages associated with them, but also tend to suffer from

specific disadvantages. Which of the following is a disadvantage of a private placement when compared

to other methods of selling new securities?

A) strictly standardized features/terms

B) higher interest costs

C) reduced flotation costs

D) avoidance of registration with the SEC

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

42) Which of the following would NOT normally be considered a “flotation cost”?

A) underwriter’s spread

B) dividends

C) legal fees

D) printing and engraving expenses

Keywords: Flotation Costs

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

43) The costs associated with issuing securities to the public can be high. Some types of securities have

greater expenses associated with them than others. Which of the following is the most costly security to

issue?

A) common stock

B) corporate bonds

C) preferred stock

D) all of the above

Keywords: Flotation Costs

Learning Obj.: L.O. 2.2

AACSB: Analytical Thinking

44) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability

for which of the following groups?

A) corporate officers

B) public accountants

C) boards of directors

D) all of the above

Keywords: Sarbanes-Oxley Act of 2002

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

45) The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense

for any instances of misconduct EXCEPT

A) company officers.

B) outside members of the board of directors.

C) lawyers.

D) investors.

Keywords: Sarbanes-Oxley Act of 2002

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

46) The Sarbanes-Oxley Act, or SOX

A) holds corporate advisors strictly accountable in a legal sense for any instances of misconduct.

B) pretexts the interests of shareholders by providing greater protection against accounting fraud and

financial misconduct.

C) reduces the cost of financial reporting by standardizing reporting requirements.

D) accomplishes both A and B.

Keywords: Sarbanes-Oxley, SOX

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

47) A commitment fee is

A) an amount paid on the unused portion of a loan in a private placement.

B) an amount paid by an investment banker to ensure the sale of securities.

C) paid by investors to guarantee that a company will borrow from them.

D) paid by bondholders to secure the right to convert bonds into common stock.

Keywords: Commitment Fee, Private Debt Placements

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

48) What are the three major functions of an investment banker?

Keywords: Investment Banker

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

49) What are the five key methods by which securities are distributed to final investors?

Keywords: Security Offerings

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

50) Within the financial markets, explain what we mean by “private placements” and name the

advantages and disadvantages.

Keywords: Private Placement

Learning Obj.: L.O. 2.2

AACSB: Reflective Thinking

Learning Objective 2.3

1) Over time, there has been a high correlation between actual rates of return on securities and the

securities’ standard deviations of returns.

Keywords: Risk-Return Trade-off, Standard Deviation, Actual Return

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

2) The rate of return available on the next best investment alternative for the saver refers to the

opportunity cost of funds.

Keywords: Opportunity Cost of Funds

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

3) Investors expect to receive the highest returns from government-issued securities because the

government will not default on securities that it has issued.

Keywords: Risk-Return Trade-off

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

4) The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real

rate of interest is

A) 5.0%.

B) 6.86%.

C) 5.1%.

D) 4.9%.

Keywords: Fisher Effect, Real Rate of Interest, Nominal Interest Rate

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

5) A basis point is equal to

A) one percent.

B) one-tenth of one percent.

C) one-hundredth of one percent.

D) one-half of one percent.

Keywords: Basis Point

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

6) The prime lending rate is the base rate on

A) mortgage loans.

B) home equity loans.

C) auto loans.

D) corporate loans.

Keywords: Prime Rate

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

7) The real rate of return is the return earned above the

A) default risk premium.

B) risk-adjusted return.

C) inflation risk premium.

D) variability of returns measured by standard deviation.

Keywords: Real Rate of Return, Inflation Risk Premium

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

8) The risk premium would be greater for an investment in an oil and gas exploration in unproven fields

than an investment in preferred stock because

A) oil and gas exploration investments have a greater variability in possible returns.

B) the preferred stock is more liquid.

C) the inflation rate would vary more with oil and gas exploration investments.

D) both A and B

Keywords: Variability of Returns, Liquidity Premium, Risk Premium

Learning Obj.: L.O. 2.3

AACSB: Analytical Thinking

9) What was the average annual rate of return on 3-month U.S. Treasury bills during the period 1990 to

2014?

A) 2.15%

B) 4.23%

C) 3.04%

D) 5.68%

Keywords: U.S. Treasury Bills, Rate of Return

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

10) What was the average annual rate of return on long-term government bonds (30-year Treasury bonds)

during the period 1990 to 2014?

A) 4.14%

B) 5.88%

C) 5.49%

D) 7.82%

Keywords: Long-term Government Bonds, Rate of Return

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

11) What was the average annual rate of return on long-term corporate bonds during the period 1926 to

2014?

A) 8.3%

B) 6.5%

C) 6.10%

D) 7.00%

Keywords: Long-term Government Bonds, Rate of Return

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

12) What was the average annual rate of return on common stocks during the period 1926 to 2014?

A) 15.4%

B) 18.6%

C) 10.1%

D) 9.5%

Keywords: Small Firm Common Stocks, Rate of Return

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

13) Over the period 1926 to 2014, the standard deviation of returns has been the greatest for which of the

following?

A) Treasury bills

B) corporate bonds

C) government bonds

D) common stocks

Keywords: Small Firm Common Stocks, Standard Deviation

Learning Obj.: L.O. 2.3

AACSB: Reflective Thinking

14) Which of the following represents the correct ordering of returns over the period 1926 to 2014 (from

lowest to highest return)?

A) Treasury bills, long-term government bonds, long-term corporate bonds, common stocks

B) common stocks, long-term government bonds, long-term corporate bonds, Treasury bills

C) Treasury bills, common stocks, long-term corporate bonds, long-term government bonds

D) long-term corporate bonds, Treasury bills, long-term government bonds, common stocks

Keywords: Rate of Return, Risk-Return Tradeoff

Learning Obj.: L.O. 2.3

AACSB: Analytical Thinking