investment banks, banks as insurers

Question 1

What are the main functions of investment banks?

Answer 1

Managing financial transactions, raising capital, and navigating complex financial markets.

Question 2

What are the four main activities of investment banks?

Answer 2

Advisory services, underwriting, market making, proprietary trading.

Question 3

What is a merger?

Answer 3

When two companies combine as equals.

Question 4

What is an acquisition?

Answer 4

When one company buys another, which may or may not remain independent.

Question 5

What is a takeover?

Answer 5

A more aggressive, often hostile acquisition.

Question 6

What is a divesture?

Answer 6

When a company sells off part of its business to another company.

Question 7

What role do investment banks play in advisory services?

Answer 7

Valuation, deal structuring, negotiation, due diligence, regulatory advisory.

Question 8

How do investment banks earn revenue from advisory services?

Answer 8

Through advisory fees.

Question 9

What is a spin-off?

Answer 9

A company separates a division into a new, independent company.

Question 10

What is a carve-out?

Answer 10

A company sells part of its business but retains a stake

Question 11

What is a leveraged buyout?

Answer 11

A firm acquires a company using a large amount of debt.

Question 12

What is the difference between management buyouts and management buy-ins?

Answer 12

Buyouts involve existing management acquiring the company, while buy-ins involve external management.

Question 13

What is underwriting?

Answer 13

Assisting companies in raising capital by issuing securities

Question 14

What are the four types of underwriting?

Answer 14

Bond issuance, convertible bond issuance, IPO, and SEO

Question 15

What are the investment bank’s responsibilities in underwriting?

Answer 15

Determining feasibility, designing the deal, testing demand, pricing, selling securities, and managing market reaction.

Question 16

What is client-driven market making?

Answer 16

When a bank acts as a counterparty to facilitate trades for clients.

Question 17

What is bank-driven market making?

Answer 17

When banks manage short-term inventory risk but do not make speculative bets.

Question 18

How do banks earn revenue from market making?

Answer 18

Through market spreads, execution fees, and exchange rebates.

Question 19

What is proprietary trading?

Answer 19

When investment banks trade using their own money for profit.

Question 20

Why has proprietary trading declined?

Answer 20

Due to regulatory restrictions and risk management concerns.

Question 21

What is the buy side of investment banking?

Answer 21

Assisting clients in maximizing returns when investing in securities.

Question 22

What is the sell side of investment banking?

Answer 22

Selling shares in IPOs/SEOs, placing bonds, market making, and facilitating transactions.

Question 23

What are the three categories of investment bank activities?

Answer 23

Front office, middle office, back office.

Question 24

What does the front office do?

Answer 24

Client-facing roles like M&A, portfolio investment management, and market analysis.

Question 25

What does the middle office do?

Answer 25

Supports the front office by processing transactions and analyzing capital flow.

Question 26

What does the back office do?

Answer 26

Handles trade confirmations, settlement, and technology platforms.

Question 27

What are the two main types of insurance services?

Answer 27

General insurance and life insurance.

Question 28

What is general insurance?

Answer 28

Protects asset value against financial loss from adverse events.

Question 29

What are the two subcategories of general insurance?

Answer 29

Personal lines (high volume, standardized) and commercial lines (low volume, specialized).

Question 30

What is life insurance (assurance)?

Answer 30

Provides financial security for an individual and their dependents.

Question 31

What is the difference between insurance and assurance?

Answer 31

Insurance covers uncertain events (e.g., accidents), while assurance covers inevitable events (e.g., death)

Question 32

What is the main goal of insurance?

Answer 32

To minimize financial loss.

Question 33

What is the main goal of assurance?

Answer 33

To provide a fixed payment for a certain event.

Question 34

What are the main sources of revenue for insurers?

Answer 34

Premium payments and investment returns.

Question 35

What are the main costs for insurers?

Answer 35

Claims on insurance contracts and operational expenses.

Question 36

What is the formula for insurance profitability?

Answer 36

Profits = Premium revenue + Interest earned - Claim costs - Other expenses.

Question 37

How do insurers minimize risk?

Answer 37

By diversifying their portfolio across different types of insurance and regions.

Question 38

What is the Modern Portfolio Theory (MPT) in insurance?

Answer 38

A portfolio with different investment contracts across various countries minimizes risk.

Question 39

How do insurers set premiums?

Answer 39

Using risk assessment and statistical models to determine fair pricing.

Question 40

What is adverse selection?

Answer 40

When low-risk customers are assigned high premiums.

Question 41

What is moral hazard?

Answer 41

When an insured entity takes risks that go against contract terms.

Question 42

What is the insurance cycle?

Answer 42

The tendency of the insurance industry to swing between profitable and unprofitable periods over time.