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Chapter 16 True/False Questions

1. For securities firms, income from investment management is more stable than the income from underwriting or trading. Answer: True Page: 457 Level: Medium

2. Full line investment banks act as both broker dealers and securities underwriters. Answer: True Page: 455 Level: Easy

3. A private placement is allowed under SEC Rule 415 to allow large corporations to preregister an upcoming security offering for up to two years in advance. Answer: False Page: 458 Level: Medium

4. Issuers of privately placed securities must still register the issue with the SEC. Answer: False Page: 457 Level: Medium

5. In a best efforts offering the investment banker acts as an agent for the issuer rather than as a principle. Answer: True Page: 459 Level: Easy

6. A market maker buys IBM at $185 for his own account and sells the stock later in the day at $187. He is acting as a broker in this transaction. Answer: False Page: 460-461 Level: Easy

7. Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage. Answer: False Page: 461 Level: Easy

8. An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices. Answer: True Page: 461 Level: Easy

9. A stock broker acts as a principle on behalf of the customer. Answer: False Page: 461 Level: Medium

10. Securities firms often provide deposit type services through cash management accounts. Answer: True Page: 462 Level: Easy

11. Program trading is the simultaneous buying and selling of at least $1 million worth of at least 15 stocks. Answer: True Page: 461 Level: Medium

12. The major source of funds for securities firms are repurchase agreements. Answer: True Page: 466-467 Level: Easy

13. Equity capital levels of securities firms are higher than for banks since securities firms cannot offer insured deposits. Answer: False Page: 467 Level: Medium

14. One could argue that decimalization has cut dealer profit margins but may have helped increase broker profits. Answer: True Page: 461 Level: Difficult

15. The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000. Answer: False Page: 468 Level: Medium

16. In the recent past, stock research analysts received bonuses for generating allegedly biased research reports that helped to sell new issues underwritten by their firm. Answer: True Page: 463,468 Level: Easy

17. Total dollar value of debt underwriting exceeded total equity underwriting dollar volume in every year from 1990 to 2001. Answer: True Page: 465 Level: Medium

Multiple Choice Questions

18. Full line securities firms engage in all but one of the following A) Trading and brokerage of existing securities B) Corporate restructuring and advice C) Issuing new securities D) Raising money via insured deposits Answer: D Page: 453-454 Level: Easy

19. A best efforts offering is one where A) The underwriter bears the risk of an unsuccessful offering. B) The bid-ask spread is exceptionally high, but the investment banker does their best to sell the issue anyway. C) The investment banker acts as a principle for the issuer. D) The investment banker acts only as a distribution agent. E) The issue can only be privately placed. Answer: D Page: 459 Level: Easy

20. If an underwriter overestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Sell the shares back to the issuing firm at a discount. B) Lower the bid price to the issuing firm. C) Increase the fees charged to the issuing firm. D) Cancel the issue and refund the fees paid by the issuing firm. E) None of the above Answer: E Page: 459 Level: Medium

21. If an underwriter underestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Raise the offer price to the public B) Lower the bid price to the issuing firm C) Increase the fees charged to the issuing firm D) Cancel the issue E) None of the above Answer: E Page: 459 Level: Medium

22. Investment firms that pool money from individuals and/or institutions and invest equity funds in startup firms are called A) Top tier bankers B) Section 20 affiliates C) Venture capital firms D) ECNs E) Discount brokerage houses Answer: C Page: 456 Level: Easy

23. You buy French Francs in New York and simultaneously sell them in Frankfurt for a gain. This is an example of A) Position trading B) Program trading C) Pure arbitrage D) Risk arbitrage E) Hedging Answer: C Page: 461 Level: Medium

24. An unregistered issue sold to a few large institutional buyers is an example of a A) Best efforts offering B) Fully underwritten public offering C) Shelf offering D) Private placement E) SEC Rule 415 offering Answer: D Page: 468 Level: Medium

25. An investment banker agrees to a firm commitment offering of 1 million shares of Ace stock. The offer price is set at $45 and the spread is 50 cents per share. If the stock is actually sold to the public at $44 however, what is the investment banker's gain or loss? A) $1,000,000 gain B) $1,000,000 loss C) $500,000 gain D) $500,000 loss E) None of the above Answer: D Page: 459 Level: Medium

26. Day to day trading practices of securities firms currently may be regulated by which of the following? I. NASD II. SEC III. NYSE IV. SIPC A) I only B) II only C) I and II only D) I and III only E) II and IV only Answer: D Page: 468 Level: Medium

27. Firms in the securities industry are required to maintain a minimum capital to asset ratio of _____ A) 2% B) 4% C) 6% D) 8% E) 10% Answer: A Page: 467 Level: Medium

A) B) C) D) E)

28. In 2000 and 2001 the top IPO underwriter (by $ volume) was Goldman-Sachs Merrill-Lynch Citigroup SSB J.P. Morgan Chase UBS Warburg

Answer: B Page: 458 Level: Easy

29. The major result of NSMIA was to A) Reduce state regulatory powers over securities firms B) Establish the SIPC C) Create the NASD D) All of the above E) None of the above Answer: A Page: 467-468 Level: Easy

30. The largest source of funds for a securities firm is A) Short positions in securities and commodities B) Payables to other broker dealers C) Securities sold under repurchase agreement D) Call loans E) Securities purchased under agreements to sell Answer: C Page: 467 Level: Easy

31. _____________ are examples of investment bankers offering traditional commercial banking services. A) Online brokers B) Cash management accounts C) Underwriting corporate debt and equity offers D) Venture capital funds E) Mergers and acquisition services Answer: B Page: 462 Level: Medium

A) B) C) D) E)

32. An investment banker may be unwilling to engage in a firm commitment offer if The issuer is relatively unknown to the public The issuer desires too low an offer price The investment banker is concerned about overall market price volatility Both A and C Both B and C

Answer: D Page: 459 Level: Medium

33. When an underwriter engages in a firm commitment, the underwriter is acting as A) A principle B) An agent C) An asset transformer D) An M&A advisor E) All of the above Answer: A Page: 459 Level: Easy

34. Underwriter spreads will normally be larger on A) A shelf offering than on an IPO B) A best efforts offer than on an IPO C) A best efforts offer than on a seasoned offering D) An IPO than a seasoned offering E) Less risky issues Answer: D Page: 457-459 Level: Easy

35. In July 2002 the U.S. Congress passed the Corporate Governance and Accounting Oversight bill. Among other things, this bill I. Created an independent auditing oversight board run by the SEC II. Increased penalties for corporate wrongdoers III. Eliminated the use of stock options for executive compensation A) I only B) I and II only C) I and III only D) II and III only E) I, II and III Answer: B Page: 468 Level: Medium

36. From 1991 to 2001, foreign investor transactions in U.S. securities ___________ and U.S. investor transactions in foreign securities ______________. A) increased ; increased B) increased ; decreased C) decreased ; increased D) decreased ; decreased E) increased ; stayed the same Answer: A Page: 470 Level: Medium

37. The SEC primarily sets standards to regulate securities firms' A) Program trading and arbitrage strategies B) M&A and cash management activities C) Profitability and holding companies activities D) Trading and underwriting activities E) Corporate advisory and M&A activities Answer: D Page: 467-468 Level: Medium

Chapter 17 True/False Questions

1. Because of the differences in the makeup of their major loan types, finance companies typically have shorter term loans than banks. Answer: True Page: 473 Level: Medium

2. The twenty largest finance companies own about 80% of the industry's assets. Answer: True Page: 475 Level: Easy

3. The first major finance company was formed by Filene's Basement to service the credit needs of its employees. Answer: False Page: 473 Level: Easy

4. An installment loan is one where all the principle is repaid at maturity. Answer: False Page: 473 Level: Easy

5. As of 2000, the largest finance company was General Motors Acceptance Corporation. Answer: False Page: 476 Level: Easy

6. The largest commercial mortgage lender in the U.S. is a finance company. Answer: True Page: 475 Level: Medium

7. Sales finance institutions specialize in loan sales to banks and thrifts. Answer: False Page: 475 Level: Medium

8. Except for certain special promotional deals, finance companies generally charge higher rates for similar loans than do commercial banks. Answer: True Page: 478 Le