Definitions

Question 1

Underwriting

Answer 1

Underwriting is the process of collecting capital for a business by selling financial instruments (stocks & bonds)

Question 2

Equity

Answer 2

The ownership stake in a company sold to outside investors; the first sale of equity is the IPO.

Question 3

IPO

Answer 3

Initial Public Offering - the first sale of equity

Question 4

Debt capital

Answer 4

Bonds; company pays prearranged rate of interest, but no ownership. If financial difficulties, bondholders have higher claim on assets of company than do equity owners if a liquidation of company occurs.

Question 5

Hybrid securities

Answer 5

A security that has traits of both debt and equity.

Ex. Preferred shares - investors get income stream higher than what’s paid on regular equity, but don’t get as high a claim on assets as bonds. Company can suspend this income stream if it chooses.

Question 6

Front office

Answer 6

Sells investments
courts companies
pairs up buyers and sellers
conducts trading
proprietary trading - “prop trading”

Question 7

Proprietary Trading

Answer 7

Investment bank trades using own money, not client’s.

Was very profitable, but mostly abolished mid-2015 through the Volcker Rule because of the high risk. Blamed in part for 2008 financial crisis.

Question 8

Volcker Rule

Answer 8

Part of Dodd-Frank, involves limits on prop trading by investment banking firms.

Restricts banking firms from making speculative investments on their own account, only allowing them to trade on behalf of customers.

Enacted 2015, and caused mass exodus of top proprietary traders from investment banks to hedge funds.

Question 9

Middle office

Answer 9

Cooks up new types of securities to be sold.

Also: Compliance, Risk Management

Question 10

Back office

Answer 10

Systems and procedures: computer systems and operations

Question 11

Auction rate securities

Answer 11

Debt instruments with no fixed rate, instead interest rate bid on via auction conducted by investment bank.

2007-2009 financial crisis these auctions weren’t successful. Investors who bought them couldn’t resell them on the secondary market. Market for auction rate securities dried up.

Question 12

Credit Default Swaps

Answer 12

A financial instrument that allows lenders (think mortgage lenders) to sell risk that borrowers (think mortgage borrowers) won’t meet their obligations.

CDS act as a form of unregulated insurance policies - extremely complicated and exacerbated interdependencies among giant financial firms.

Question 13

Investment Management

Answer 13

Investment professionals paid to invest money on behalf of individual clients or institutions.

Question 14

Bulge bracket

Answer 14

The big players

JPM Citi BoA, Wells Fargo, MS, GS

Question 15

Boutique

Answer 15

smaller, focus on one or select few areas of IB

Jefferies - a boutique global investment bank

Question 16

Regional

Answer 16

Focus on geographic area and sometimes on a particular type of IB service: trading, underwriting, etc.