Chapter 3--Investment Banking

Student: ___________________________________________________________________________

1. The market in which securities are initially sold to the general public is the secondary
market.
True False

2. When an individual buys stock through a secondary market (e.g., the NYSE), the firm
receives the sales proceeds.
True False

3. An investment banker specializes in corporate loans.

True False

4. In an underwriting, the firm selling (issuing) the securities forms the syndicate.
True False

5. The underwriting of an issue of securities guarantees the firm issuing the securities a
specified amount of money.
True False

6. The risk associated with an underwriting rests with the investment bankers.
True False

7. A major function of the New York Stock Exchange is to raise money for firms.
True False

8. The price of a new issue is established through the registration process with the SEC.
True False
9. In a best efforts agreement to sell new securities, the firm issuing the securities
agrees to make the best effort to sell the securities.
True False

10. Firms whose securities are already publicly held may file a shelf registration for
possible future sales of stocks and bonds.
True False

11. If a company went public at $10 per share and the shares immediately upon reaching
the public sell for $13, the $3 windfall gain goes to the underwriter.
True False

12. If an investment banker makes a best efforts agreement to sell 1,200,000 shares at
$10 a share, the investment banker must sell at least 200,000 shares.
True False

13. A prospectus gives estimates of a firm's prospective earnings for five years.
True False

14. The larger the dollar value of an underwriting, the smaller is the underwriting
discount as a percentage of the offer price.
True False

15. In an underwriting the managing house forms the syndicate.

True False

16. If an issue of securities is overpriced, the underwriters may let the price fall to sell
the securities.
True False
17. The purchasing of a new issue of stock is different than buying stock on the NYSE
because in the former funds flow to the firm while in the latter the funds flow to the
individual selling the shares.
True False

18. The SEC establishes a price for a new issue of securities.

True False

19. A major function of the NYSE is to facilitate the transfer of funds between investors
and firms.
True False

20. A firm that guarantees the proceeds from the sale of a new issue of securities is the
A. brokerage firm
B. syndicate
C. underwriter
D. insurance company

21. If the initial offer price for new securities is too high, the underwriters may

1. purchase the securities with their own funds

2. sell the securities at the offer price
3. let the price fall

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 1, 2, and 3

22. If a stock is initially offered to the public for $20 in an underwriting but the price
immediately falls to $15,

1. the firm received $20 a share

2. the initial investors sustain a loss
3. demand exceeded supply
4. supply exceeded demand

A. 1, 2, and 3
B. 1, 2, and 4
C. 2 and 3
D. 2 and 4
23. An investment banker

1. often underwrites new issues of securities

2. may be a division within a brokerage firm
3. facilitates the sale of new securities

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. all three

24. Which of the following is not part of the underwriting process?

A. the prospectus
B. the Federal Reserve
C. the Securities and Exchange Commission
D. the syndicate

25. An investment banker

1. is usually not a banker

2. is frequently a division of a brokerage firm
3. serves as a middleman between financial intermediaries and firms issuing new securities

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. only 3

26. Which of the following is part of the underwriting process?

A. the Federal Reserve
B. the Securities Investor Protection Corporation
C. FDIC
D. the originating house

27. Venture capitalists

A. buy existing securities
B. are a source of funds for large firms
C. buy securities issued by small, emerging firms
D. register the securities they purchase with the SEC

28. If the initial offer price is too low,

1. supply will exceed demand

2. demand will exceed supply
3. the price of the security will rise
4. the price of the security will decline

A. 1 and 3
B. 1 and 4
C. 2 and 3
D. 2 and 4

29. An investment banker is not a financial intermediary because

A. it does not transfer money from investors to firms
B. it does not create claims on itself
C. it does facilitate the transfer of funds
D. it creates claims on itself

30. The Securities Investor Protection Corporation protects individuals from

A. fraud by corporations
B. making poor investment decisions
C. other investors who fail to make delivery
D. brokerage firm failures

31. The Securities and Exchange Commission regulates

A. trading in publicly held securities
B. trading in privately held securities
C. the margin requirement
D. the amount a stock's price may change

32. The regulation of securities markets

A. discourages investing by requiring the registration of investors
B. is enforced by the Federal Reserve
C. protects investors from their own mistakes
D. provides investors with information to make informed decisions
Chapter 3--Investment Banking Key

1. The market in which securities are initially sold to the general public is the secondary
market.
FALSE

2. When an individual buys stock through a secondary market (e.g., the NYSE), the firm
receives the sales proceeds.
FALSE

3. An investment banker specializes in corporate loans.

FALSE

4. In an underwriting, the firm selling (issuing) the securities forms the syndicate.
FALSE

5. The underwriting of an issue of securities guarantees the firm issuing the securities a
specified amount of money.
TRUE

6. The risk associated with an underwriting rests with the investment bankers.
TRUE

7. A major function of the New York Stock Exchange is to raise money for firms.
FALSE

8. The price of a new issue is established through the registration process with the SEC.
FALSE
9. In a best efforts agreement to sell new securities, the firm issuing the securities
agrees to make the best effort to sell the securities.
FALSE

10. Firms whose securities are already publicly held may file a shelf registration for
possible future sales of stocks and bonds.
TRUE

11. If a company went public at $10 per share and the shares immediately upon reaching
the public sell for $13, the $3 windfall gain goes to the underwriter.
FALSE

12. If an investment banker makes a best efforts agreement to sell 1,200,000 shares at
$10 a share, the investment banker must sell at least 200,000 shares.
FALSE

13. A prospectus gives estimates of a firm's prospective earnings for five years.
FALSE

14. The larger the dollar value of an underwriting, the smaller is the underwriting
discount as a percentage of the offer price.
TRUE

15. In an underwriting the managing house forms the syndicate.

TRUE

16. If an issue of securities is overpriced, the underwriters may let the price fall to sell
the securities.
TRUE
17. The purchasing of a new issue of stock is different than buying stock on the NYSE
because in the former funds flow to the firm while in the latter the funds flow to the
individual selling the shares.
TRUE

18. The SEC establishes a price for a new issue of securities.

FALSE

19. A major function of the NYSE is to facilitate the transfer of funds between investors
and firms.
FALSE

20. A firm that guarantees the proceeds from the sale of a new issue of securities is the
A. brokerage firm
B. syndicate
C. underwriter
D. insurance company

21. If the initial offer price for new securities is too high, the underwriters may

1. purchase the securities with their own funds

2. sell the securities at the offer price
3. let the price fall

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 1, 2, and 3

22. If a stock is initially offered to the public for $20 in an underwriting but the price
immediately falls to $15,

1. the firm received $20 a share

2. the initial investors sustain a loss
3. demand exceeded supply
4. supply exceeded demand

A. 1, 2, and 3
B. 1, 2, and 4
C. 2 and 3
D. 2 and 4
23. An investment banker

1. often underwrites new issues of securities

2. may be a division within a brokerage firm
3. facilitates the sale of new securities

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. all three

24. Which of the following is not part of the underwriting process?

A. the prospectus
B. the Federal Reserve
C. the Securities and Exchange Commission
D. the syndicate

25. An investment banker

1. is usually not a banker

2. is frequently a division of a brokerage firm
3. serves as a middleman between financial intermediaries and firms issuing new securities

A. 1 and 2
B. 1 and 3
C. 2 and 3
D. only 3

26. Which of the following is part of the underwriting process?

A. the Federal Reserve
B. the Securities Investor Protection Corporation
C. FDIC
D. the originating house

27. Venture capitalists

A. buy existing securities
B. are a source of funds for large firms
C. buy securities issued by small, emerging firms
D. register the securities they purchase with the SEC

28. If the initial offer price is too low,

1. supply will exceed demand

2. demand will exceed supply
3. the price of the security will rise
4. the price of the security will decline

A. 1 and 3
B. 1 and 4
C. 2 and 3
D. 2 and 4

29. An investment banker is not a financial intermediary because

A. it does not transfer money from investors to firms
B. it does not create claims on itself
C. it does facilitate the transfer of funds
D. it creates claims on itself

30. The Securities Investor Protection Corporation protects individuals from

A. fraud by corporations
B. making poor investment decisions
C. other investors who fail to make delivery
D. brokerage firm failures

31. The Securities and Exchange Commission regulates

A. trading in publicly held securities
B. trading in privately held securities
C. the margin requirement
D. the amount a stock's price may change

32. The regulation of securities markets

A. discourages investing by requiring the registration of investors
B. is enforced by the Federal Reserve
C. protects investors from their own mistakes
D. provides investors with information to make informed decisions