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Chapter 15 - Investment Banking: Public and Private Placement
1. The investment banker is someone who buys large new issues of stocks and then sells them
to the public after their price has risen.
2. The whole area of investment banking is becoming more competitive.
Chapter 15 - Investment Banking: Public and Private Placement
3. An investment banker acts as a middleman between a corporation needing funds and
investors with funds.
4. As a middleman, the investment banker is responsible for designing and packaging a
security offering and selling it to the public.
5. The years 2008 and 2009 are likely to go down in history as one of the worst environments
for companies wishing to go public.
6. The top 10 underwriters in the world are all large U.S. firms.
Chapter 15 - Investment Banking: Public and Private Placement
7. The largest underwriter of both stocks and bonds during 2009 was Citigroup.
8. In investment banking, the equity market is larger than the debt market.
9. 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.
10. The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
Chapter 15 - Investment Banking: Public and Private Placement
11. A market maker transacts in stocks as a broker.
12. Small investment banking houses may handle distributions for relatively unknown
corporations on a "best-efforts" basis.
13. The term "underwriter" is synonymous with risk-taker or risk-bearer.
14. Large well-established investment bankers often distribute new issues on a best-efforts
basis.
Chapter 15 - Investment Banking: Public and Private Placement
15. Only a small amount of security issues are sold on a "best-efforts" basis.
16. In today's market environment, most investment banking houses specialize in
underwriting and do not engage in the dealer-broker function.
17. The investment banking industry has shifted its emphasis from mergers and acquisitions
to underwriting new securities.
18. The movement of non-brokerage firms into the brokerage area has forced traditional
securities firms to expand their staffs.
Chapter 15 - Investment Banking: Public and Private Placement
19. Investment banking has changed from a very competitive price-sensitive environment to
one where relationships determine who gets the business.
20. Continued consolidation is not expected in the investment banking industry, as market
share and global competition have stabilized.
21. "Best efforts" and "direct" methods account for a small portion of investment banking
offerings.
22. 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.
Chapter 15 - Investment Banking: Public and Private Placement
23. The investment banking industry has shifted its activities to underwriting new securities,
rather than advising on mergers and acquisitions.
24. The underwriting spread is the guaranteed minimum profit to an investment bank for each
share distributed.
25. It would not be unusual for an investment banking syndicate to include as many as 30
investment banking houses in large offerings.
26. An underwriting syndicate is a group of investment bankers who help to distribute a new
issue for a company.
Chapter 15 - Investment Banking: Public and Private Placement
27. One purpose of an underwriting syndicate is to distribute securities to the public.
28. The out-of-pocket cost to issue new common stock is always paid by the investment
banker.
29. The issuing company desires to have as little underpricing as possible.
30. An underpriced offering represents a permanent lost opportunity to the issuing firm.
Chapter 15 - Investment Banking: Public and Private Placement
31. When a firm issues new stock, it always results in dilution of earnings in the long run.
32. IPOs generally underperform compared to the general market in the immediate
aftermarket.
33. The term underpricing describes the process of setting the spread between the participants
of the investment banking syndicate.
34. Investment bankers can help a firm undertake a secondary offering when the company is
too small for a primary offering IPO.
Chapter 15 - Investment Banking: Public and Private Placement
35. 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.
36. Between 1990 and 2009, the average first-day return for IPOs in the U.S. was over 30
percent.
37. Shelf registration has nearly eliminated competition in the investment banking industry.
38. Only the strong investment bankers are in a position to benefit from the new shelf
registration process.
Chapter 15 - Investment Banking: Public and Private Placement
39. Rule 415 allows corporations to quickly take advantage of market conditions.
40. Shelf registration requires the firm to file one comprehensive registration statement, which
outlines the company's immediate long-term financing plans.
41. Shelf Registration has contributed to the concentrated nature of the investment banking
industry.
42. Shelf Registration is most frequently used with new issues of common stock.
Chapter 15 - Investment Banking: Public and Private Placement
43. Shelf registration primarily gives large, strong companies flexibility in the timing of debt
or equity issues.
44. When a company first goes public, a registration statement must be filed with the New
York Stock Exchange.
45. Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage
of the offering price.
46. Google's IPO was controversial because Google used a Dutch investment banking firm to
underwrite the IPO.
Chapter 15 - Investment Banking: Public and Private Placement
47. Private placement eliminates the expensive registration process with the Securities
Exchange Commission.
48. 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.
49. Privately placed bonds are the most popular method of raising long-term corporate debt.
50. Investment banks are hesitant to issue bonds when they perceive the interest rate to be
low.
Chapter 15 - Investment Banking: Public and Private Placement
51. The use of banks to finance leveraged buy-outs has often caused a misdirection of capital.
52. Leveraged buy-outs usually entail the use of a large proportion of debt to take control of
the firm.
53. A major trend of privatization in foreign markets began in the 1990's.
54. 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.
Chapter 15 - Investment Banking: Public and Private Placement
55. One of the reasons why the debt market is much larger than the equity market is because
debt issuances mature periodically unlike equity issuances.
56. The primary rationale for repealing the Glass-Steagall Act was that the U.S. Congress
recognized the necessity for increased growth in the investment banking industry within the
U.S.
57. The "best-efforts" method of underwriting is the most common method used in issuances.
58. 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%.
Chapter 15 - Investment Banking: Public and Private Placement
59. Because of their lower levels of risk to the underwriter, debt issuances have lower spread
percentages than equity percentages and smaller issuances have lower spread percentages than
large issuances.
60. Investment banking is highly concentrated with the top 10 underwriters controlling 90%
of the global market for stocks and bonds.
61. Stock prices for Amazon and eBay managed to avoid the turbulent price movements that
followed the collapse of the Internet bubble.
62. The current leader in the mortgage-backed market is Bank of America - Merrill Lynch.
Chapter 15 - Investment Banking: Public and Private Placement
63. Which of the following is not a key role of an investment banker?
64. The investment banker's function involves all of the following except
65. The investment banker may advise clients on a continuing basis about
Chapter 15 - Investment Banking: Public and Private Placement
66. Which investment bank underwrote the most common stock and bonds in 2009?
67. The Gramm-Leach-Bliley Act
68. The Glass-Steagall Act prohibited
Chapter 15 - Investment Banking: Public and Private Placement
69. Investment banking is changing dramatically to an industry where
70. When an investment banker acts as an "underwriter" he
71. The risk function of investment banking is categorized mainly under:
Chapter 15 - Investment Banking: Public and Private Placement
72. In issuing stock, the term "spread" refers to
73. The managing investment banker is responsible for
74. An investment banker makes money from
