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FMI > Securities firms and investment banks > Flashcards

Securities firms and investment banks Flashcards

1
Q

Do investment banks act as asset transformers?

A

No, only as brokers

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2
Q

Are investment banks measured by asset or equity size? Why?

A

Equity, because they focus on securities trading rather than long-term investments

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3
Q

Define securities firms

A
  • Retail services to investors
  • Securities trading (brokerage + mkt making)
  • Purchase, sale and brokerage of existing securities
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4
Q

Define Investment Banks

A
  • Commercial side –> underwriting and placement of issues on the primary market
  • corporate finance activities
  • Advice in M&A
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5
Q

Has the number of firms in the securities firms + investment banking increased or decreased throughout the years?

A

Decreased due to M&A, economies of scope, economy and changes in regulations

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6
Q

Define commercial banks/ financial services holding companies

A

They are investment banks that also do the CB part. Offer advice, underwriting, brokerage, trading and asset management.
Work in a domestic and international environment.
- J.P Morgan, Bank of America

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7
Q

Define National full-service firms

A

They specialize on corporate finance or primary and secondary market activities.

  • Goldman Sachs
  • M&A, advisory and consultancy
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8
Q

Define large Investment banks

A

They maintain more limited branch networks concentrated in major cities, operating predominantly with institutional clients
- Lazard Ltd and Greenhil Co

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9
Q

What is the recent type of M&A among investment banks? And by what have they been encouraged?

A

Interindustry mergers encouraged by a regulatory change: the Financial Services Modernization Act.

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10
Q

What are the 8 services offered by securities firms and IB? (no explanation)

A

-Investment banking
-venture capital
Market trading
-Trading
-Investing
-Cash management
-M&A
-Other services

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11
Q

Define the service “investment banking”

A
  • IPOs and seasonal offers
  • Private and public placements
  • Best efforts underwriting and firm commitment
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12
Q

What is best efforts underwriting and what role does the IB take?

A

IB act as an agent, that is, usually puts together a bank syndicate to help them sell the securities issue. It doesn’t buy any, gets a fee.

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13
Q

What is firm commitment and what role does the IB take?

A

IB act as principals. That is it buys the issue and sell it to investors at a higher price. They are exposed to underwriting risk = not being able to sell at a higher P

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14
Q

Define the service “Venture capital (VC)”

A

Professionally managed pool of money used to finance new and high risk firms. They are NON-passive investors, that is, they are involved in the management

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15
Q

What are thee different types of VC investing

A
  1. LIMITED PARTNER = act as general partners in the firm, organize it, then liquidate investment
  2. FINANCIAL VENTURE = subsidiaries of CB’s investments
  3. CORPORATE VENTURE = investment in high-tech firms
    - ANGEL VENTURE CAPITALISTS = wealthy INDIVIDUALS who make equity investments
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16
Q

What are VCs looking when investing?

A
  • High returns =high risk

- Easy exit

17
Q

Define the service “Market making”

A

Create a secondary market for an issue of securities, operating as an agent/broker on behalf of the client or as a dealer, on their own behalf. They have the OBLIGATION to buy/sell from their own pocket to create a liquid market and to offer the best prices, thus they TAKE ON RISKS.

18
Q

What is the difference between VC and Private equity investments?

A
  • Funds origin = PE sell securities to raise funds

- Type of investment = PE acquire established existing firms, rather than start-ups

19
Q

Define the service “ trading” and its different types

A
  • Taking an active net position on an instrument.
    Types:
    1. POSITION TRADING –> Maintain the position for long-term
    2. PURE ARBITRAGE –> Buying an asset and immediately selling it on the market, benefiting from price discrepancies
    3. RISK ARBITRAGE –> Buying securities in anticipating some information release. It is risky because the event might not occur
    4. PROGRAM TRADING –> Simultaneously buying and selling of at least 15 different stocks valued at >=$1 million
    5. STOCK BROKERAGE –> trading on behalf of customers
    6. ELECTRONIC BROKERAGE –> offering customers direct access to the trading floor, via internet
20
Q

Define the service “Investing”

A

Managing a pool of assets either as an agent or as a a principal for themselves and for stockholders

21
Q

Define the service “cash management”

A

Money market mutual funds sold by investment banks that offer check writing privileges

22
Q

Define the service “M&A”

A
  • Finding merger partners
  • Underwrite new securities to be issued by the merged firms
  • Assess the value of the target firms
  • Recommend the terms
  • Assist target firms in preventing a merger
23
Q

Define “other services” by IBs

A
  • Custody and escrow
  • Clearance and settlement
  • Research and advisory
  • Inroads to traditional banking (soft dollars) to finance internal research
24
Q

What were the post crisis consequences faced by IBs?

A

Regulation was passed on risk-taking and capital requirements –> balance sheet reduction, downsizing selected businesses, trading products and investments
-Corporate strategy shifted to client services and away from making large bets through principal investments

25
Q

Are assets on IBs balance sheet of long-, medium- or short-term?

A

Short and medium

26
Q

What are the biggest assets for IBs?

A

Cash and cash equivalent from brokerage/trading fees

27
Q

Do IBs have a high financial leverage?

A

Yes, they use securities to finance their assets

28
Q

Do IBs have minimum reserves?

A

No

29
Q

What are the main risks that IBs suffer from?

A

interest risk, sovereign and foreign exchange risk

30
Q

What are some liabilities of IBs?

A
  • Payables to customers and brokers
  • Securities and commodities sold short for future delivery
  • Securities under repurchase agreement

FMI (10 decks)

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