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Indicate whether the statement is true or false.
1. Securities firms avoided exposure to mortgages during the credit crisis because they sold their mortgage holdings
before the crisis began.
a. True
b. False
2. Securities firms engage in proprietary trading, which means that they serve as an intermediary by trading shares of
stock requested by proprietorships.
a. True
b. False
3. The Securities and Exchange Commission’s approval of a registration statement guarantees the quality and safety of the
securities to be issued.
a. True
b. False
4. When a securities firm increases its financial leverage, the firm reduces both its potential return on equity (ROE) and its
risk.
a. True
b. False
5. During the credit crisis, many commercial banks were forced to convert to securities firms.
a. True
b. False
6. The Federal Reserve intervened to help securities firms during the credit crisis in order to reduce the potential adverse
effects of systemic risk.
a. True
b. False
7. When a firm spins off a unit, it creates new shares of stock representing the unit and distributes them to its existing
shareholders.
a. True
b. False
8. Under SEC Rule 144A, firms may engage in private placements of stock without filing the extensive registration
statement that is required for public placements.
a. True
b. False
9. When securities firms facilitate initial public offerings (IPOs), they attempt to price the stock high enough to satisfy the
issuing firm.
a. True
b. False
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10. Institutional investors that are willing to hold stock for only a very short period of time are prime candidates for
participating in a private placement.
a. True
b. False
11. If securities firms are subject to systemic risk, this means that their main source of risk is a rise in interest rates, which
may cause the value of their bond holdings to decline.
a. True
b. False
12. Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of
future financing.
a. True
b. False
13. When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to
the issuing corporation.
a. True
b. False
14. The Financial Reform Act created the Financial Stability Oversight Council, which is responsible for identifying risks
to financial stability in the United States.
a. True
b. False
15. During the credit crisis, some large securities firms were either acquired by commercial banks or converted into bank
holding companies.
a. True
b. False
16. The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income.
a. True
b. False
17. One of the main functions of securities firms is helping corporations and governments raise funds.
a. True
b. False
18. One reason for the financial problems of securities firms during the credit crisis was that they used a high degree of
financial leverage.
a. True
b. False
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19. Many of the fees that securities firms charge for advising clients on a possible merger are typically dependent on
whether the merger takes place.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
20. After a target firm is acquired, the acquirer may sell off divisions of the target that are not compatible with the
acquirer’s business. This process is known as
a. bridging.
b. asset stripping.
c. greenmail.
d. None of these are correct.
21. The ____ is NOT involved in the regulation of the securities industry.
a. Deposit Insurance Fund
b. Financial Industry Regulatory Authority
c. Securities and Exchange Commission
d. Federal Reserve Board
e. All of these are involved in the regulation of the securities industry.
22. Which of the following is NOT a way that a securities firm might advise a corporation to restructure its operations?
a. a stock pass-through
b. a spinoff of a unit
c. a carve-out
d. a divestiture
23. ____ is NOT a service that a securities firm provides in placing bonds.
a. Divestiture
b. Underwriting
c. Distribution
d. Advising
e. All of these are services that securities firms provide in placing bonds
24. When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the
securities firm, must be included in the ___________ that is submitted to the Securities and Exchange Commission.
a. origination
b. registration statement
c. best-efforts agreement
d. None of these are correct.
25. Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.
a. lower; small
b. lower; large
c. higher; large
d. lower; small AND higher; large
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26. The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors
who purchase the shares a day after the IPO are generally ____.
a. high; high
b. high; low
c. low; high
d. low; low
27. When securities firms help corporations issue bonds, their primary role is as a(n)
a. intermediary.
b. lender (creditor).
c. investor.
d. lendor (creditor) AND investor.
28. ____ are NOT included in flotation costs.
a. Issue costs
b. Fees paid to the underwriters
c. Taxes paid on income earned from the stock offering
d. Registration expenses
29. Asset stripping refers to
a. acquiring shares in a firm and then causing the firm to repurchase the shares at a premium to prevent a takeover.
b. financing provided by a securities firm to help support an acquisition.
c. investing in the shares of a firm that is expected to experience a leveraged buyout (LBO).
d. selling off individual divisions of an acquired firm that are not compatible with the acquirer’s business.
30. Research indicates that securities firms tend to
a. overprice IPOs.
b. underprice IPOs.
c. price IPOs correctly.
d. None of these are correct.
31. Securities firms serve as intermediaries for all of the following, EXCEPT
a. stock offerings.
b. bond offerings.
c. IPOs.
d. Securities firms serve as intermediaries for all of the these.
32. When securities firms facilitate an IPO, they attempt to price the stock
a. at a level that will enable institutional investors who invest in the IPO to earn reasonable returns.
b. high enough to satisfy the issuing firm.
c. at a level that will enable the securities firms to place the entire issue.
d. All of these are correct.
33. The SEC’s Regulation Fair Disclosure (FD)
a. requires firms to disclose any significant information to the SEC before making public announcements.
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b. requires firms to disclose any significant information to the Federal Reserve before releasing it to the public.
c. requires firms to disclose any significant information simultaneously to all market participants.
d. prohibits insiders at firms from trading on significant inside information.
34. Which of the following does NOT play a role in regulating securities trading?
a. Financial Industry Regulatory Authority
b. Resolution Trust Corporation
c. New York Stock Exchange
d. Federal Reserve
35. In a ____ of stock, all of the shares issued may be held by a small number of institutional investors.
a. market placement
b. public placement
c. shelf placement
d. private placement
36. The price of newly issued stock should be ____ the market price of the firm’s outstanding stock.
a. about the same as
b. much more than
c. much less than
d. either much more than or much less than, depending on the amount of stock issued
37. The ________ places limits on proprietary trading by commercial banks and securities firms that have become bank
holding companies.
a. Bernanke Rule
b. Financial Safety Rule
c. Volcker Rule
d. Securities Reform Act
38. As a result of the Financial Services Modernization Act
a. securities firms had to search for loopholes to expand into other types of financial services.
b. firms that formed a special finance holding company were regulated by the SEC.
c. banking, securities activities, and insurance services could be consolidated in a single financial institution.
d. securities firms were prohibited from expanding into other types of financial services.
39. A bridge loan provided by a securities firm would most likely be made to
a. an acquirer that needs temporary financing to complete a merger.
b. a commercial bank in the federal funds market.
c. a mutual fund that needs to cover share redemptions.
d. an institutional investor that has received a margin call and needs to add cash to its margin account.
40. Which of the following is NOT an example of a securities firm that experienced financial problems as a result of
taking on excessive risk when engaging in proprietary trading?
a. Washington Mutual
b. Société Générale
c. Bear Stearns
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d. Barings Bank
41. The ____ regulates the issuance of securities.
a. Securities and Exchange Commission
b. National Association of Securities Dealers
c. Federal Reserve Board
d. Securities Investor Protection Corporation
42. The ____ offers insurance on cash and securities deposited at brokerage firms.
a. Federal Reserve
b. New York Stock Exchange
c. Securities Investor Protection Corporation (SIPC)
d. Securities and Exchange Commission (SEC)
43. Which of the following is NOT an SEC rule?
a. Analysts at a securities firm underwriting an IPO cannot promote the stock for the first 40 days after the IPO.
b. An analyst’s compensation should be directly aligned with the amount of business that the analyst brings to the
securities firm.
c. Analysts cannot be supervised by the investment banking department within the securities firm.
d. When rating a security, an analyst must divulge any recent investment banking business provided by the analyst’s
securities firm to the firm that issued the security.
44. The ____ determines margin requirements on securities purchased.
a. Securities and Exchange Commission
b. Financial Industry Regulatory Authority
c. Federal Reserve Board
d. Securities Investor Protection Corporation
45. Which of the following is NOT a function that a securities firm commonly performs when facilitating a secondary
stock offering?
a. origination
b. underwriting the stock
c. distribution of the stock
d. purchasing at least 20 percent of the offering
46. The value of a securities firm is typically ____ related to interest rate movements.
a. Positively
b. Not
c. Inversely
d. either Positively or Inversely, depending on the direction of the interest rate movements.
47. Securities firms commonly engage in all of the following EXCEPT
a. proprietary trading.
b. underwriting stock.
c. operating mutual funds.
d. providing brokerage services.
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e. operating credit unions.
48. The ____ can liquidate failing brokerage firms.
a. Securities and Exchange Commission
b. Financial Industry Regulatory Authority
c. Federal Reserve Board
d. Securities Investor Protection Corporation
49. Securities firms that converted to bank holding companies during the credit crisis
a. gained more flexibility to obtain financing from the Federal Reserve.
b. had to give up their traditional securities function of underwriting.
c. came under greater regulatory oversight by the Securities Investor Protection Corporation.
d. were prohibited from investing in or selling mortgage-backed securities.
50. Which of the following is NOT a service that is commonly performed by a securities firm?
a. setting regulatory rules for stock exchanges
b. origination
c. underwriting
d. distribution of stock or bond offerings
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Answer Key
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