Test 3- Chapter 24 Securities Operations Flashcards
Due to the financial crisis of 2008, the investment banking industry was largely consolidated under financial service conglomerates, or?
big banks
what is the name for the investment bankings core business?
origination
what does origination mean?
raising capital/new money for companies
What things does an investment bank do in origination
evaluate
price
figure out how much to issue
and whether it should be stocks or bonds
the first sale of stock by private company to the public
initial public offering (IPO)
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
private placement
what are the two types of underwriting?
best efforts and firm commitment
which kind of underwriting does this describe:
bank does not guarantee a price or amount raised in IPO. Most IPOs are done this way
best efforts
what kind of underwriting does this describe:
bank guarantees price and amount raised and bears the risk
firm commitment
Explain how best efforts works
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
why would an investment bank ever do firm commitment?
because some companies themselves are really hot and know they can sell and thus demand firm commitment
when there is a super large IPO what happens
usually it’s shared between investment banks
what is proprietary trading?
bank trades assets (securities, currencies, derivatives) for their own account
there is a limitation on proprietary trading from what rule in the dodd frank act?
Volker rule
what is asset management
the management of assets for wealthy clients and institutions
reorganizing the legal, ownership, or operations to increase value of the firm overall
restructuring
What are the 4 types of restructuring?
leveraged buyout
mergers and acquisitions
spin-offs
carve-outs
explain leveraged buyouts
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
consolidation or takeover between two firms to produce growth potential and/or value
mergers & acquisitions
where does the investment bank come into play with mergers and acquisitions?
bank provides advising and financing
what is synergy?
when two firms together are worth more than individual
what is the hottest form of restructuring in 2015?
M&A
explain spin-offs
transfer ownership of part of business to existing shareholders to create more value
EXISTING SHAREHOLDERS GET OWNERSHIP IN SPIN OFF
explain carve outs
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
brokerage is an ___________ between markets and investors
intermediary
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
full service
who are the regulators of investment banks?
SEC
stock exchanges (NYSE)
FINRA
SIPC
which regulator does this describe:
set rules about what it means to trade on market place, and how to go about trading
stock exchanges
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
FINRA
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
SIPC
what kind of risks are associated with securities operations?
market, interest rate, credit, and exchange rate
why is the market risk so high?
because if the stock or bond markets fall or rise they are heavily affected by them
why is the exchange rate risk high?
because if dollar falls and rises a lot really affects bottom line
what is crowdfunding?
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
