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CHAPTER 18
TRUE/FALSE QUESTIONS
simultaneously engage in commercial banking.
takes place in the secondary market.
houses.
banks out of the commercial lending area.
lenders, respectively.
funds necessary to cover the transaction, borrowing 40%.
Federal government securities and general obligation bonds of states and municipalities.
U.S. provided commercial banks permission to underwrite commercial paper and municipal
revenue bonds but not equities.
obligations.
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than an equivalent underwriting of securities.
issuer is borne by the investment bank.
securities sold.
activities.
deposits and making business loans.
funds from the Treasury. This means there is very limited career opportunities in investment
banking.
commercial banking activities.
by investment banks.
MULTIPLE-CHOICE QUESTIONS
a. discouraging speculation in financial markets.
b. limiting bank mergers when the merger might adversely affect competition.
c. preventing conflict of interest and self-dealing.
d. restoring confidence in the commercial banking system.
e. All of the above were the objectives of the Glass-Steagall Act.
a. making commercial loans
b. bringing new security issues to market
c. trading securities
d. brokerage
a. origination, underwriting, and sales.
b. registration of securities, storage of securities, and execution of trades.
c. execution of trades, investment advice, and margin credit.
d. cash management service, private placements, and security distribution.
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a. invest in common equities
b. underwrite U.S. government securities
c. underwrite corporate bond issues.
d. purchase any debt securities for their own account.
e. both b and c
a. negotiated offering
b. underwritten offer
c. preliminary search
d. competitive bidding
e. initial underpricing
a. design of the security to fit the needs of the market and the issuing firms.
b. filing of the required registration statements.
c. obtain a credit rating on a debt issue.
d. commit to a specific price to the issuing firm and attempt to sell the security in the
market.
a. places an interest rate ceiling on private placement financing.
b. permits trading in private placement securities after a two-year wait, enhancing the
liquidity of the investment.
c. permits sophisticated institutional investors to invest in private placement securities.
d. permits the trading of private placement trading before the traditional two-year holding
period, enhancing the liquidity of the investment.
a. higher costs of financing because of increased regulation.
b. lower-cost financing because of the reduction in default risk provided by the regulation.
c. lower-cost financing because private placement investors can now trade private
placement securities instead of holding them for a two-year period.
d. the right not to register their issues with SEC.
a. The underwriting function is avoided.
b. The extremes of high credit quality firms and low or unknown credit quality firms use
private placements.
c. The terms may be negotiated between the issuer and the investors.
d. The sale of securities must be restricted to a small group of accredited investors.
e. All of the above is true.
a. The sale of securities directly to the ultimate investor and not through a public offering.
b. The underwriting function cannot be avoided.
c. A fee is earned for the origination/selling or uniting the supplier and user of funds.
d. A private placement may reduce the total flotation costs for a business.
e. It is used by both lesser-known firms and large, well-known firms in need of funds.
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loans, could perform many financial services and were known as
a. private banks.
b. universal banks.
c. Jay Cooke banks.
d. industrial banks
e. money banks
a. insurance from credit.
b. investment banking from mutual funds.
c. investment banking from commercial banking.
d. insurance from mutual funds.
the Great Depression?
a. Securities Act
b. Securities Exchange Act
c. Glass-Steagall Act
d. Financial Services Modernization Act
securities in the primary market as
a. a seasoned offering.
b. a rights offering.
c. an IPO.
d. a private placement
e. a best efforts offering.
which is
a. the highest price offered to the issuing firm.
b. the lowest price paid by the investment banker.
c. the highest price which allows the entire issue to be sold quickly at the offering price.
d. the price that will maximize the amount obtained by the investment banker.
is a summary of the
a. registration statement filed with Federal Reserve.
b. public announcement of price and number of securities issued by the SEC.
c. registration statement filed with the SEC.
d. duties of the investment banker in the primary offering.
a. securing a credit rating from a rating service provider.
b. obtaining the security certificates printed by the Federal Reserve Banks.
c. selecting a transfer agent.
d. selecting a trustee.
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a. Substantial control over management decisions
b. Low-risk investments with low returns
c. A share of capital appreciation
d. Serves as intermediate financing between founders’ capital and the IPO
security issue is
a. the formation of a selling group.
b. the formation of an underwriting syndicate.
c. allotting shares of the issue to participating brokers.
d. paying a high price to the issuing firm.
underwritten, it is performing the ________ function in the market.
a. registration
b. dealer
c. broker
d. advisory
a. margin trading
b. insider trading
c. exchange market trading
d. registration of the issue
a. customer accounts balances.
b. call loans from commercial banks.
c. their net worth.
d. loans from the SEC.
a. execution of trades
b. storage of securities
c. making a market in the customers’ securities
d. margin credit to customers
e. investment advice
a. using futures contracts to hedge their price risk.
b. underpricing a new issue.
c. reducing the size of the selling group in the underwriting.
d. reducing the number of investment banking firms in the underwriting syndicate.
a. broker
b. arbitrager
c. dealer
d. investment banker
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acquiring firms:
a. Investment advice to target companies.
b. Identify merger target companies for the acquirer.
c. Analysis and pricing of the deal.
d. Merger negotiation assistance.
a. to institutional investors such as mutual funds
b. to retail investors
c. back to the issuer
d. both a and b
a. commercial banks operating in the U.S. prior to 1980.
b. financial institutions outside of the U.S. that can engage in deposit taking, making loans,
brokerage activities, securities underwriting, and offering insurance services.
c. investment banks operating in the U.S. prior to 1980.
d. commercial banks that can also sell universal life insurance policies.
e. none of the above.
a. the risk of selling the issue at a price higher than that promised to the issuer is borne by
the investment bank.
b. the difference between the price at which the issue is sold and that promised to the issuer
represents the underwriting spread or the profit earned by the investment bank.
c. the investment bank guarantees the issuing firm a certain price.
d. both a and b
e. all of the above
a. an investment banker
b. an issuer
c. investors
d. a selling group
e. a dealer
a. The investment bank is compensated based on the number of securities sold.
b. The risk of the securities not selling or not selling at a desired price is borne by the
issuing firm, not the investment bank.
c. Typically, the smaller and more risky issuers are forced to use this type of offering.
d. All of the above is true.
a. customer credit balances
b. federal funds sold
c. repurchase agreements
d. call loans from banks
e. All of the above are sources of funds for security brokers and dealers.
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a. at the “idea” stage of a new business
b. at the product development stage.
c. at the time of the IPO.
d. in the year prior to the public offering.
34. (c) Mezzanine or bridge financing is provided by a venture capital firm to finance
a. seasonal inventory needs.
b. long-term capital needs.
c. before the IPO.
d. research and development.
a. a private fund
b. a corporate subsidiary
c. a publicly funded small business investment corporation
d. a trust department of a commercial bank
36. (a) Venture capital firms provide _______ financing to be used for product development and
initial marketing and _______ financing to initiate manufacturing and sales.
a. start-up; first-stage
b. seed; start-up
c. seed; first-stage
d. first-stage; start-up
e. first-stage; second-stage
Pear Computer stock. The offer price is set at $55 and the spread is 50 cents per share. If the
stock is actually sold to the public at $53.80 however, what is Rehman Sisters’ gain or loss?
a. $1,400,000 gain
b. $1,400,000 loss
c. $500,000 gain
d. $500,000 loss
e. $1,000,000 loss
Macrohard Computer stock. The offer price is set at $35 per share. There are no other fees or
expenses. If the stock is actually sold to the public at $34.50 and the banker charges a 3.45 cent
commission per share sold, what is the amount of funds that Macrohard Computer receives?
a. $88,750,000
b. $87,500,000
c. $86,163,750
d. $85,176,430
e. $84,122,560
a. Best efforts offering
b. Private placement
c. Program trading
d. Pure arbitrage
e. Firm commitment offering
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a. Venture capitalists are aggressive investors
b. Venture capitalists contribute liability financing rather than invest in equity
c. Most private venture capitalists are organized as limited partnerships
d. The federal government licenses some private firms to provide lower cost funds to
entrepreneurs
e. Angel venture capitalists are wealthy individuals who fund business startups.
ESSAY QUESTIONS
1. Discuss the intense competitive battle between commercial and investment banks for corporate
client business. Why have investment banks and commercial banks sought to step into each
other’s business?
2. Name and discuss the important procedures involved in bringing a new security issue to market
by an investment banking firm.
3. Explain the differences between underwritten offers and best-effort arrangements for IPOs.
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4. What are the major services of a full-service investment banking/brokerage firm? What does
each provide for financial investors and funds-seeking firms and governments?
5. How might SEC Rule 144A enhance the liquidity and lower the financing costs in private
placements?
6. Venture capitalists provide a unique service to developing businesses. Discuss their services and
the organizational structures used by venture capital firms.
Answer: Venture capitalists are usually institutional investors who provide upstart financing for
7. YR Megan Chaze, an investment banker, agrees to a firm commitment offering of 1.2 million
shares of Formosan Tech stock. The offer price is set at $25.50 and the spread is 30 cents per
share. If there are no other fees or expenses, the stock is actually sold to the public at $26.00.
What is the amount of funds Formosan Tech receives?