Test 3- Chapter 24 Securities Operations

Question 1

Due to the financial crisis of 2008, the investment banking industry was largely consolidated under financial service conglomerates, or?

Answer 1

big banks

Question 2

what is the name for the investment bankings core business?

Answer 2

origination

Question 3

what does origination mean?

Answer 3

raising capital/new money for companies

Question 4

What things does an investment bank do in origination

Answer 4

evaluate
price
figure out how much to issue
and whether it should be stocks or bonds

Question 5

the first sale of stock by private company to the public

Answer 5

initial public offering (IPO)

Question 6

what is the term this explanation is referring to:
debt or equity purchased by the wealthy, hedge funds, etc
a company wants to raise money
this is a new security issue with minimal fling or risk
less expensive and faster than an IPO
less public than IPO
very commonly done

Answer 6

private placement

Question 7

what are the two types of underwriting?

Answer 7

best efforts and firm commitment

Question 8

which kind of underwriting does this describe:

bank does not guarantee a price or amount raised in IPO. Most IPOs are done this way

Answer 8

best efforts

Question 9

what kind of underwriting does this describe:

bank guarantees price and amount raised and bears the risk

Answer 9

firm commitment

Question 10

Explain how best efforts works

Answer 10

bank says they’ll use their network to try and sell the stock or bonds, but bank is not guaranteeing they’re going to sell all the stocks/bonds

therefore the bank is saying they will give their best effort to sell

investment banks have a network or brokers and dealers, to brokers, IPOS are hot commodities and brokers tend to make a lot of money on them, therefore the most successful brokers are the ones allocated with the largest amount of shares

Question 11

why would an investment bank ever do firm commitment?

Answer 11

because some companies themselves are really hot and know they can sell and thus demand firm commitment

Question 12

when there is a super large IPO what happens

Answer 12

usually it’s shared between investment banks

Question 13

what is proprietary trading?

Answer 13

bank trades assets (securities, currencies, derivatives) for their own account

Question 14

there is a limitation on proprietary trading from what rule in the dodd frank act?

Answer 14

Volker rule

Question 15

what is asset management

Answer 15

the management of assets for wealthy clients and institutions

Question 16

reorganizing the legal, ownership, or operations to increase value of the firm overall

Answer 16

restructuring

Question 17

What are the 4 types of restructuring?

Answer 17

leveraged buyout
mergers and acquisitions
spin-offs
carve-outs

Question 18

explain leveraged buyouts

Answer 18

typically, an investor acquires controlling interest in a company’s equity, often using borrowed funds (leverage)

the investment banking firm sets value for firm, helps raise debt by issuing junk bonds

Question 19

consolidation or takeover between two firms to produce growth potential and/or value

Answer 19

mergers & acquisitions

Question 20

where does the investment bank come into play with mergers and acquisitions?

Answer 20

bank provides advising and financing

Question 21

what is synergy?

Answer 21

when two firms together are worth more than individual

Question 22

what is the hottest form of restructuring in 2015?

Answer 22

M&A

Question 23

explain spin-offs

Answer 23

transfer ownership of part of business to existing shareholders to create more value

EXISTING SHAREHOLDERS GET OWNERSHIP IN SPIN OFF

Question 24

explain carve outs

Answer 24

sell off or offer IPO for part of firm

EXISTING SHAREHOLDERS DON’T GET SHARES IN NEW COMPANY, BUT ONCE SOLD OFF, USUALLY PARENT COMPANY SHARES GO UP

Question 25

brokerage is an ___________ between markets and investors

Answer 25

intermediary

Question 26

what kind of brokerage does this describe:
person who has clients and they help manage money on behalf of people, get to know clients and develop plans for you (stocks, bonds, insurance)

clearly more expensive and there has been a resurgence since the financial crisis

Answer 26

full service

Question 27

who are the regulators of investment banks?

Answer 27

SEC
stock exchanges (NYSE)
FINRA
SIPC

Question 28

which regulator does this describe:

set rules about what it means to trade on market place, and how to go about trading

Answer 28

stock exchanges

Question 29

which regulator does this describe:
set up by Congress as independent, non-profit to protect investors in the securities industry. create and enforce rules, check for competence and transparency

Answer 29

FINRA

Question 30

which regulator does this describe:
non-profit, member funded insurance fund, reports to SEC; coverage up to $500,000

its for when your brokerage company fails, but there are vague rules and it’s not commonly used

Answer 30

SIPC

Question 31

what kind of risks are associated with securities operations?

Answer 31

market, interest rate, credit, and exchange rate

Question 32

why is the market risk so high?

Answer 32

because if the stock or bond markets fall or rise they are heavily affected by them

Question 33

why is the exchange rate risk high?

Answer 33

because if dollar falls and rises a lot really affects bottom line

Question 34

what is crowdfunding?

Answer 34

investing in small business and startups, but you don’t get shares of stock, you get discounts/gifts, this is really risky and offers little protection