Module 8 - Raising Capital in the Capital Markets

Question 1

As an offshoot of the 2008 global financial crisis, a trade transaction over listed securities in an organized market like a stock exchange is less risky from the perspective of both an institutional and retail investor compared to an over-the-counter transaction over unlisted securities on account of which market process and convention?

Answer 1

Central counterparty that clears and settles all done trades

Question 2

The Philippine Stock Exchange, Inc. (PSE) is a stock exchange that was the result of the unification of the Manila Stock Exchange and Makati Stock Exchange. Which among the following best captures the fundamental function of PSE?

Answer 2

An organized marketplace that brings together buyers and sellers of listed securities and provides the rules and services to listed companies and brokers that allow clients of brokers to transact their trades over the listed securities

Question 3

Which of the following functions is not assumed by a central counterparty (CCP)?

Answer 3

Facilitates trade matching of bids and asks posted by investors

Question 4

Which of the following would be a benefit derived by listed companies in The Philippine Stock Exchange, Inc.?

Answer 4

a. Determination of the market value given by investors for the company;
b. Ready access to the capital markets for fund-raising purposes;
c. Price discovery and liquidity for its shares of stock;
d. Tax efficiency for secondary transactions compared to over-the-counter trades

Question 5

The classification of a bond instrument as a “green bond” is desired by an issue due to which of the following considerations?

Answer 5

Investor demand has been driving the growth of the green bond market and issuers would like to attract global investors to their public offering

Question 6

The sustainability of markets will be facilitated by which of the following?

Answer 6

a. Lack of liquidity due to absence of market makers for securities;
b. Single product offering;
c. Inability to compete against viable threats or alternatives;
d. Regulatory response to market developments in the fintech space;
e. None of the above. (answer)

Question 7

“Common shares” of a corporation represent which of the following?

Answer 7

Residual ownership interest in the corporation;

Question 8

Which of the following would be a fund-raising option in the primary market?

Answer 8

Initial public offering of securities that will not be listed in a stock exchange

Question 9

True or False: Financial markets fail to produce efficient outcomes due to asymmetry of information.

Answer 9

True, because only insiders would benefit from the information

Question 10

Frederic Mishkin, an economist and business school professor, synthesized the events and circumstances of the 2008 Great Financial Crisis (GFC), as follows:

Financial history and the financial crisis of 2007-2009 indicates that one type of bubble, which is best referred to as a credit-driven bubble, can be highly dangerous. With this type of bubble, there is the following typical chain of events: Because of either exuberant expectations about economic prospects or structural changes in financial markets, a credit boom begins, increasing the demand for some assets and thereby raising their prices. The rise in asset values, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more. This feedback loop can generate a bubble, and the bubble can cause credit standards to ease as lenders become less concerned about the ability of the borrowers to repay loans and instead rely on further appreciation of the asset to shield themselves from losses.

At some point, however, the bubble bursts. The collapse in asset prices then leads to a reversal of the feedback loop in which loans go sour, lenders cut back on credit supply, the demand for the assets declines further, and prices drop even more. The resulting loan losses and declines in asset prices erode the balance sheets at financial institutions, further diminishing credit and investment across a broad range of assets. The decline in lending depresses business and household spending, which weakens economic activity and increases macroeconomic risk in credit markets. In the extreme, the interaction between asset prices and the health of financial institutions following the collapse of an asset price bubble can endanger the operation of the financial system as a whole.

Given the foregoing, which of the following conclusions is supported by the observations of Frederick Mishkin?

Answer 10

Before the crisis, professional investors made their own institutions and the overall financial system vulnerable by taking on too much risk. When the crisis hit, they faced a shortfall of liquidity such that the resulting liquidity swings caused many financial markets to plunge and rebound together

Question 11

The shares of stock of real estate investment trusts (REIT), just like the shares of ordinary corporations, are subjected to the same regulatory framework given the fungibility of shares as an asset class. From the perspective of an issuer, which of the following would effectively attract sponsors to convert their companies to REITs?

Answer 11

Fiscal incentives resulting in a lower taxable base for income tax purposes

Question 12

Fintech innovation, including digital assets and crypto currencies, has been made possible by which of the following regulatory developments?

Answer 12

Regulatory sandbox to foster innovation without fear of regulatory backlash

Question 13

True or False. Traditional investments offer institutional investors with better price stability and consistently better returns compared to alternative investments such as private equity, venture capital and hedge funds.

Answer 13

False, as the volatility of traditional investments cannot be totally eliminated although features such as trading bands can help minimize volatility, while returns generated by alternative investments can also be higher than market returns of traditional investments.

Question 14

A company aiming to raise capital from the capital markets will be incentivized to publicly offer debt securities over voting preferred shares due to which of the following benefits of debt securities over equity securities?

Answer 14

Non-dilution of the ownership interest of the sponsors

Question 15

ABC Corporation is a publicly-listed company seriously considering tapping the bond market and raising capital
to fund its strategic initiatives for 2022-2025. The chief financial officer (CFO) of ABC Corporation expects
interest rates to increase given the hawkish pronouncements by the US Federal Reserve Chair Jerome Powell.
Nevertheless, the CFO is aware that the interest rate environment is unpredictable given the global pandemic
and the economic ramifications and wants to be able to incorporate a provis ion that will benefit the issuer.
Which of the following provisions will be beneficial to ABC Corporation?

Answer 15

Call provision

Question 16

Which of the following statements related to secondary bond markets is most accurate?

Answer 16

Secondary bond markets are where bonds are traded between investors;

Question 17

A profitable company planning to list in the Philippine Stock Exchange (PSE) can nevertheless conduct a private
placement of debt securities as a preparatory fund-raising exercise before actual listing in the PSE. As discussed
in class, a private placement transaction will require which of the following?

Answer 17

a. compliance with the SEC requirements on prior registration of the securities;
b. compliance with the underwriting requirements of the PSE;
c. compliance with the standard requirements of the bond market exchange for debt securities;
d. compliance with the prescribed debt to equity ratios of the PSE for listing via an initial public
offering;
e. None of the above. (answer)

Question 18

An investment bank that is contractually engaged to provide underwriting services on a firm commitment basis
to an issuer for a bond issuance will most likely perform which of the following transactions?

Answer 18

buys and resells the newly-issued bonds to investors or dealers;

Question 19

To an investor, a preferred share of a publicly-listed company is more attractive than a common share of the
same company due to the fact that:

Answer 19

a. the cumulative feature of a preferred share guarantees investors that they will receive dividends on an
annual basis in all cases;
b. the non-voting feature of a preferred share;
c. the higher capital gains potential of a preferred share;
d. the benefit of tax efficiency for secondary transactions of preferred shares compared to common shares;
e. None of the above. (answer)

Question 20

To an investor, an upward sloping yield curve will indicate that:

Answer 20

Longer term government bonds will have higher yields than shorter term bonds;

Question 21

In an initial public offering underwritten by an investment bank, there have been instances when first day listing
closing prices have been observed to decline compared to the public offering price. This risk is sought to be
mitigated by the issuer and the underwriter by incorporating which of the following in the offer terms and
prospectus?

Answer 21

a. Lock-up period for principal stockholders for at least 180 days pursuant to the rules of the PSE;
b. Price stabilization to be conducted by the sponsors and principal stockholders for a period of not more
than thirty (30) days from listing date under PSE and SEC regulations;
c. Longer book-building period prior to price-fixing date;
d. Prohibition against short-selling;
e. None of the above. (answer)

Question 22

ABC Corporation is a renewable energy company that aspires to be listed in the Main Board of the PSE. Its
founder would most likely be attracted to attaining a public company status coupled with listing in the PSE due
to which of the following?

Answer 22

a. Price discovery feature of markets;
b. Presence of trading bands will assure the founder that the market price of ABC Corporation shares will
be stable while it remains listed;
c. Insider trading and manipulative devices will be mitigated by the underwriters through self-regulation
under the Securities Regulation Code;
d. Presence of independent directors to eliminate the risk presented by related party transactions;
e. All of the above. (answer)

Question 23

A start-up company with high-growth potential will not generally be eligible for listing in the Philippine Stock
Exchange (PSE) due to non-compliance with the __(a)___ requirements under the listing rules. However, the
amended PSE listing rules provide for an alternative mode of listing said company in the SME Board under the
__(b)___ listing rules of the PSE.

Answer 23

(a) track record and minimum stockholders equity; (b) sponsor model;

Question 24

The reinvestment requirement feature of the rules and regulations for real estate investment trusts (REITs) is a
regulatory tool to achieve which of the following outcomes:

Answer 24

National economic development occasioned by the development of the real estate industry since the
covered proceeds are required to be reinvested by sponsors in the Philippines;

Question 25

Notwithstanding the risk of greenwashing as a negative externality to investors, sustainable finance is gaining
wider adoption among issuers given the benefits to the issuer and investors and alignment of financing initiatives
with the sustainability goals of issuers. Which of the following constitutes a benefit to issuers of green bonds?

Answer 25

First mover advantage on the early adopters and a potential pricing benefit for green bond issuances;

Question 26

An exchange traded fund (ETF) presents to investors an attractive investment proposition compared to mutual
funds and unit investment trust funds. However, active investors, including day traders, will not consider which
of the following ETF features as an advantage of ETFs compared to mutual funds and unit investment trust
funds?

Answer 26

Passive management

Question 27

Under existing laws and regulations, a real estate investment trust (REIT) is required to list in a stock exchange
and comply with the minimum public float requirements, among others. Which of the following public offering
modalities, by themselves, will constitute full compliance with the foregoing legal and regulatory requirement
for REITs?

Answer 27

Private placement of such number of REIT shares to ensure that subscribers will own at least one-third
of the issued and outstanding shares of the REIT;

Question 28

True or False. An efficient market is beneficial to the investing public because when markets are efficient,
regulators are then expected to prohibit insider trading towards achieving the objective that there be no
advantage in favor of insiders over the investing public.

Answer 28

False, because efficiency of markets has to do with the informational value of market prices given the
available material public information; on the other hand, insider trading is an evil sought to be eliminated in
all markets, whether efficient or not;

Question 29

True or False. In a registered public offering of an existing listed company, the use of proceeds indicating
redemption of outstanding preferred shares, repayment of existing loans of an issuer plus working capital
requirements constitute:

Answer 29

a valid use of proceeds allowed by regulations given that it is an exercise by management of their business
judgment.