Questions & Answers:
Chapter 1 – Overview of Investment Banking
Q1. What were the two main arguments for rejoining investment banks and retail
deposit-taking banks that led to the passing of the Gramm-Leach-Bliley Act?
A. The !rst argument is that the rejoining of the two banking businesses provides
for a more stable and countercyclical business model for these banks. The second
Q2. Describe the three principal businesses of an investment bank.
A. The investment banking division arranges !nancing for governments and
corpora&ons as well as advises on M&A transac&ons. The sales and trading
Q3. Why might a universal bank be be%er able to compete against a pure-play
investment bank for M&A and other investment banking engagements?
A. Universal banks are be%er able to use their balance sheet to lend money to
Q4. Investment bank clients can be categorized into two broad groups of issuers and
investors. These two groups o.en have compe&ng objec&ves (issue equity at highest
possible price vs. acquire stock in companies at lowest possible price). Who within
the investment bank is responsible for balancing these compe&ng interests?
A. ECM bankers are the intermediaries between these two par&es and are charged
Q5. What is a key considera&on in determining the cost and other parameters of a
corporate debt offering and why is it important?
A. Credit ra&ng: impacts future cost of debt; also could trigger covenants in exis&ng
Q6. Why might an investment bank place higher priority on sell-side M&A engagements
over buy-side engagements?
A. Comple&on-based fees: higher certainty of closing with sell-sides. In buy-sides,
Q7. What is two key considera&ons for bankers in the debt capital markets division when
working with an issuer on an offering?
A. Determining the likely impact that a new debt offering will have on the issuer’s
Q8. De!ne proprietary trading.
A. Using the bank’s own capital to make short-term, nonclient-related investments
Q9. What conflict might exist between a proprietary trading business and the rest of the
investment bank?
A. Proprietary trading competes with the bank’s hedge fund clients for trade
opportuni&es. In addi&on, weak compliance policies could lead to lapses in
Q10. What conflict might exist as a result of having both an Asset Management business
and a Private Wealth Management business?
A. PW advisors may be encouraged to invest client assets in funds managed by the