Financial Institutions Management 5th Canadian Edition Test Bank

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Student: ___________________________________________________________________________

1.     Investment banks specialize in the origination, underwriting, and distribution of new securities issued by corporations or governments.
True    False

2.     Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring.
True    False

3.     Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.
True    False

4.     The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987.
True    False

5.     Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.
True    False

6.     The revision of the Bank Act and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms since 1987.
True    False

7.     The value of assets is the traditional measure of size in the securities brokerage and investment banking industry.
True    False

8.     National integrated investment firms provide business services to both retail and corporate customers.
True    False

9.     The objective of the investment function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark.
True    False

10.   Because the business of funds management generates fees based on the size of the pool of assets managed, the flow of income is more volatile than either investment banking function or the trading function.
True    False

11.   In a public offering of a new security, an investment banker places a new issue of securities with a handful of private, usually large, investors.
True    False

12.   Initial public offerings (IPOs) are first-time issues of firms whose equity has not previously traded in an organized market.
True    False

13.   In order for an investment bank to perform a firm commitment offering of securities, they must maintain at least 20% equity on their balance sheet.
True    False

14.   A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering.
True    False

15.   When conducting a firm commitment offering, the investment bank is acting as an agent on behalf of the issuing company or government.
True    False

16.   Venture capital firms often make loans to finance new and often high-risk companies that may have no business history.
True    False

17.   As compared to venture capital firms, private equity firms specialize in assisting existing companies that have proven themselves in their industry.
True    False

18.   An angel venture capitalist is likely to be a wealthy individual that makes equity investments in unsuccessful, bankrupt firms.
True    False

19.   In order to realize a return on their investment, venture capital firms sell their equity interest in the company.
True    False

20.   Market making involves creating a primary market in a financial asset.
True    False

21.   Market makers in a stock are obligated to buy shares from sellers even when the market for the stock is declining.
True    False

22.   Agency transactions of market makers are two-way transactions on behalf of customers
True    False

23.   Principal transactions allow the market maker to always make a profit regardless of whether the market price for a specific stock is rising or falling.
True    False

24.   In pure arbitrage, a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price.
True    False

25.   Electronic brokerage allows an investor to have direct access to the trading floor.
True    False

26.   Cash management accounts were an early attempt by commercial banks to provide investment banking services to individuals.
True    False

27.   The principal reasons for the growth in profitability of the securities industry in the middle 1990s were the trading profits from fixed income securities and the growth in new issue underwriting.
True    False

28.   Activity and performance trends in the investment banking industry are highly correlated with general economic expansions and recessions.
True    False

29.   Most securities firms are subject to large amounts of interest rate and market risk because of the large amount financial assets on the balance sheet.
True    False

30.   The largest source of funding for securities service firms and investment banks as an industry is repurchase agreements.
True    False

31.   As of 2012, equity capital in the securities industry measured over 12 percent.
True    False

32.   The goal of the U.S. Sarbanes-Oxley Act is to prevent deceptive accounting and management practices and thus to increase confidence in corporate governance.
True    False

33.   The U.S.A. Patriot Act requires firms to implement processes to deter money laundering.
True    False

34.   The Canadian Investor Protection Fund (CIPF) protects investors against losses of up to $1,000,000 caused by the failure of a securities firm.
True    False

35.   Seeking international partners is a recent trend among securities firms and investment banks.
True    False

36.   Securities firms and investment banks are more involved internationally than other member of the financial services industry.
True    False

37.   The most common benchmark of relative size of a firm in the securities trading and underwriting industry is based on
A. total asset value.
B. total equity.
C. total debt.
D. annual sales.
E. annual profits.

38.   Which of the following differentiates securities firms from investment banks?
A. Securities firms are concerned with the commercial side of the business while investment banks are concerned with the retail side of the business.
B. Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.
C. Securities firms underwrite new issues of securities while investment banks provide brokerage services.
D. Securities firms originate new issues of securities and investment banks underwrite the securities.
E. Securities firms are concerned with private placements of securities whereas investment banks are concerned with publicly traded securities.

39.   Which of the following would be a key area of activity for an investment bank specializing in the commercial side of the business?
A. Purchase of existing securities.
B. Sale of securities in the secondary market.
C. Brokerage of existing securities.
D. Underwriting issues of new securities.
E. All of these.

40.   Which of the following is true?
A. Investment bankers earn fees based on the success of their placements when they underwrite using a best-efforts basis.
B. Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis.
C. With best-efforts underwriting, investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.
D. An investment banker is acting as an agent when conducting a firm-commitment offering of securities.
E. Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis; and with best-efforts underwriting, investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.

41.   Discount brokers
A. are securities firms focused on providing research support for customers.
B. conduct trades for customers but do not offer investment advice.
C. allow customers to receive investment advice at very low rates.
D. effect trades for customers on- or offline while offering investment advice.
E. are electronic trading securities firms that allow customers to trade without the use of a broker.

42.   Which of the following is most typical of broker-dealers?
A. They assist in underwriting of new securities.
B. They assist in trading of existing securities.
C. They assist in issuing new securities.
D. They assist in underwriting and distribution of new securities.
E. All of these.

43.   Which of the following is true of private placement of securities?
A. Securities are placed with few large institutional investors.
B. Securities of private firms are sold to the investing public at lower prices.
C. They must be registered with the SEC.
D. Public trading in these securities is not allowed.
E. Subject to more stringent disclosure and informational requirements than those imposed on publicly registered issues.

44.   The function of institutional venture capital firms is to
A. find and fund the most promising new firms.
B. lend funds on a long-term basis to promising new companies with no track record.
C. take equity positions in successful established companies.
D. lend funds to established companies that are faltering.
E. None of these.

45.   A corporate venture capital firm
A. has publicly-traded common stock.
B. provides equity funds to companies that already have publicly traded common stock.
C. is a subsidiary of a nonfinancial corporation.
D. provides debt funding to only to established corporations.
E. is subject to more stringent disclosure requirements than other venture capital firms.

46.   The dominant form of institutional venture capital firms operate as
A. Corporation.
B. Subsidiary of a financial company.
C. Bank holding company.
D. Limited partnership.
E. General partnership.

47.   The market-making function of investment banking can be described as
A. agency transactions are two-way transactions on behalf of customers, such as a dealer working for a fee or commission.
B. agency transactions are when market makers take long or short positions and seek profits on price movements.
C. market makers take inventory positions to stabilize the market in the securities.
D. agency transactions are two-way transactions on behalf of customers; and market makers take inventory positions to stabilize the market in the securities
E. agency transactions are when market makers take long or short positions and seek profits on price movements, and market makes take inventory positions to stabilize the market in the securities.

48.   In market-making
A. principal transactions are two-way transactions on behalf of customers, such as a dealer working for a fee or commission.
B. principal transactions are when market makers take long or short positions and seek profits on price movements.
C. market makers take inventory positions to stabilize the market in the securities.
D. principal transactions are two-way transactions on behalf of customers; and market makers take inventory positions to stabilize the market in the securities.
E. principal transactions are when market makers take long or short positions and seek profits on price movements, and market makers take inventory positions to stabilize the market in the securities.

49.   Which of the following is NOT considered a trading activity of securities firms?
A. Position trading.
B. Pure arbitrage.
C. Liquidity trading.
D. Risk arbitrage trading.
E. Program trading.

50.   Pure arbitrage trading involves
A. buying blocks of securities in anticipation of some information release.
B. purchase of stock in a company being acquired and the sale of stock in the acquiring company.
C. exploitation of a difference between a company’s current value and its estimated liquidation value.
D. buying an asset in one market at one price and selling it immediately in another market at a higher price.
E. simultaneous purchase and sale of similar shares in a single market.

51.   The largest category of assets for broker-dealers in 2013 was
A. receivables from other broker-dealers.
B. securities purchased under agreement to resell.
C. receivables from customers.
D. exchange membership.
E. long position in securities and commodities.

52.   The largest category of liabilities of broker-dealers in 2013 was
A. bank loans payable.
B. securities sold under repurchase agreements.
C. payables to customers.
D. short positions in securities and commodities.
E. payables to non-customers.

53.   In comparison to a typical bank, an investment bank is likely to have
A. lower levels of capital.
B. higher reliance on long-term debt.
C. lower levels of repurchase agreements.
D. higher levels of net interest margin.
E. higher levels of loans to customers.

54.   Integrated investment and brokerage firms
A. may specialize in providing service to both retail and corporate customers.
B. usually serve only as discount brokers without offering investment advice.
C. may specialize more in corporate finance with high activity in trading securities.
D. All of these.
E. may specialize in providing service to both retail and corporate customers, and may specialize more in corporate finance with high activity in trading securities.

55.   The management of pools of assets by securities firms is considered to be the function of
A. market making.
B. investment banking.
C. trading.
D. investing.
E. cash management.

56.   Creating a secondary market in an asset by a securities firm involves the function of
A. cash management.
B. investing.
C. market making.
D. trading.
E. investment banking.

57.   Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of
A. investing.
B. merger and acquisitions.
C. market making.
D. investment banking.
E. trading.

58.   Offering bank deposit-like accounts to individual customers by a securities firm involves
A. the function of investing.
B. the function of cash management.
C. the function of market making.
D. the function of trading.
E. the function of investment banking.

59.   The process of providing custody and escrow services, clearance and settlement services, and research and other advisory services by a securities firm involves the function of
A. mergers and acquisitions.
B. market making.
C. investment banking.
D. back-office functions.
E. cash management services.

60.   Which of the following is NOT a back-office service function in the securities industry?
A. Correspondent banking services.
B. Escrow services.
C. Clearance of securities transactions.
D. Research services.
E. Services related to settlement of securities transactions.

61.   An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called
A. risk arbitrage.
B. an agency transaction.
C. best efforts underwriting.
D. pure arbitrage.
E. a principal transaction.

62.   Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to
A. research and other advisory services.
B. custody and escrow services.
C. clearance and settlement services.
D. banking services.
E. back office services.

63.   Securities firms have equity ratios that are lower than those for banks because their balance sheets contain a larger portion of
A. illiquid assets.
B. current liabilities.
C. long term liabilities.
D. fixed assets.
E. liquid assets.