Chapter 15 Test Bank – Static Key
1. The investment banker is someone who buys large new issues of stocks and then sells them to the
public after the stock price has risen.
2. The entire area of investment banking is becoming more competitive.
3. An investment banker acts as a middleman between a corporation needing funds and investors with
funds.
4. Among several other roles, as a middleman, the investment banker is responsible for designing and
packaging a security offering and selling it to the public.
5. The year 2008 will likely go down in history as one of the worst environments for companies wishing to
go public.
6. Over 51 percent of the total revenue made through investment banking was generated by just 10 global
banking firms.
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7. The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking
operations and their investment banking operations into two different entities.
8. The Glass-Steagall Act of the 1930s was created to separate U.S. bank’s commercial and investment
sections, which later because an advantage to the U.S. banks because foreign banks were affected by
having them combined.
9. The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
10. Smaller investment banking houses may handle distributions for relatively unknown corporations on a
“best-efforts” basis.
11. The term “underwriter” is synonymous with risk-taker or risk-bearer.
12. Large well-established investment bankers often distribute new issues on a best-efforts basis.
13. Only a small amount of security issues are sold on a “best-efforts” basis.
14. In today’s market environment, most investment banking houses specialize in underwriting and do not
engage in the dealer-broker function.
15. The investment banking industry has shifted its emphasis from mergers and acquisitions to
underwriting new securities.
16. The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to
expand their staffs.
17. Investment banking has changed from a very competitive price-sensitive environment to one where
relationships determine who gets the business.
18. Continued consolidation is not expected in the investment banking industry, as market share and global
competition have stabilized.
19. “Best efforts” and “direct” methods account for a relatively small portion of investment banking roles.
20. Because there is more uncertainty involved in the initial market reaction to common stock, a larger
“underwriting spread” often exists for stocks, compared to other types of offerings.
21. The investment banking industry has shifted its activities to underwriting new securities, rather than
advising on mergers and acquisitions.
22. The underwriting spread is the guaranteed minimum profit to an investment bank for each share
distributed.
23. An underwriting syndicate is a group of investment bankers who help to distribute a new issue for a
company.
24. One purpose of an underwriting syndicate is to distribute securities to the public.
25. The out-of-pocket cost to issue new common stock is always paid by the investment banker.
26. The issuing company desires to have as little under pricing of new securities as possible.
27. An underpriced offering represents a permanent lost opportunity to the issuing firm.
28. Under pricing is when an investment banker sets the stock price above the market price to ensure that
a profit is made.
29. The goal of under pricing is to ensure that a large amount of shares of stock is sold.
30. When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is
exchanged during an initial public offering that is considered primary offerings.
31. When a firm issues new stock, it always results in a dilution of earnings in the long run.
32. When a firm issues new stock, it can result in a dilution of earnings in the short run.
33. IPOs generally underperform compared to the general market in the immediate aftermarket.
34. In 2011, IPOs rose tremendously since the market started to pick up.
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35. The term “under pricing” describes the process of setting the spread between the participants of the
investment banking syndicate.
36. When a company goes public, an initial public offering must occur to sell the ownership of the company
to the public.
37. Investment bankers can help a firm undertake a secondary offering when the company is too small for
a primary offering IPO.
38. While manipulation of security prices is normally illegal, the SEC allows underwriters to temporarily
support the price of stocks that they have brought to market.
39. After an IPO has been issued and the price of the stock drops tremendously, the investment banker is
to blame since they probably miscalculated the original stock price.
40. Shelf registration has nearly eliminated competition in the investment banking industry.
41. Only the stronger investment bankers are in a position to benefit from the shelf registration process.
42. The SEC Rule 415 allows an issuing corporation to quickly take advantage of market conditions.
43. Shelf registration requires the firm to file one comprehensive registration statement, which outlines the
company’s indefinite financial plan.
44. Shelf registration has helped larger investment banking firms become larger, while smaller investment
banking firms are left behind.
45. Shelf registration is most frequently used with new issues of common stock.
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46. Shelf registration primarily gives large, strong companies flexibility in the timing of debt or equity issues.
47. When a company first goes public, a registration statement must be filed with the New York Stock
Exchange.
48. Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the
offering price.
49. Google’s IPO was controversial because Google used a Dutch investment banking firm to underwrite
the IPO.
50. Private placement eliminates the expensive and lengthy registration process with the Securities and
Exchange Commission.
51. Even though the firm may pay a lower interest rate on a private placement, it will pay higher out–of–
pocket costs than a public offering.
52. Privately placed bonds are the most popular method of raising long-term corporate debt.
53. Investment banks are hesitant to issue bonds when they perceive the interest rate to be low.
54. Leveraged buy-outs usually entail the use of a large proportion of debt to take control of the firm.
55. A major trend of privatization in foreign markets began after 1984.
56. Privatization may have different meanings when used in the U.S. compared to foreign markets.
57. Privatization in many foreign markets means selling companies to the public that were previously
owned by the state or government.
58. A branch of investment banking that has been very opportunistic in recent years has been the increase
in sales of foreign securities of companies formerly owned by the government.
59. The primary rationale for repealing the Glass-Steag all Act was that the U.S. Congress recognized the
necessity for increased growth in the investment banking industry within the U.S.
60. The “best efforts” method of underwriting is the most common method used in issuances.
61. If the retail price of a stock issuance is $17.50 and the issuers’ price is $15.50, the total spread is
11.4%.
62. If the retail price of a stock issuance is $17.50 and the syndicate members’ price is $15.50, the total
spread is 11.4%.
63. A lower equity spread usually means that there is a lower amount of uncertainty in equity compared to
other types of capital.
64. Generally, the larger amount of shares issued means that the spread percentage would be lower.
65. Because of their lower levels of risk to the underwriter, and smaller issuances have lower spread
percentages than large issuances.
66. Investment banking is highly concentrated with the top 10 underwriters controlling 90% of the global
market for stocks and bonds.
67. Stock prices for Amazon and eBay managed to avoid the turbulent price movements that followed the
collapse of the Internet bubble.
68. Which of the following is not a key role of an investment banker?
69. The investment banker’s function involves all of the following EXCEPT
70. The investment banker may advise clients on a continuing basis about
71. Which investment bank underwrote the most bonds in 2013 and 2014?
72. The Glass-Steag all Act prohibited