Money, Banking And The Financial System 3rd Edition By Hubbard – Test Bank

Money, Banking, and the Financial System, 3e (Hubbard/O’Brien)
Chapter 11 Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

11.1 Investment Banking

1) Which type of offering typically has the lowest fees?
A) initial public offering of stocks
B) secondary offering
C) offering of investment-grade bonds
D) offering of non-investment-grade bonds
Answer: C
Diff: 1 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

2) Underwriting involves
A) insuring the life or health of individuals.
B) guaranteeing a price for new capital to the issuing firm.
C) selling stock more cheaply than conventional stockbrokers.
D) issuing stock and using the proceeds to buy bonds.
Answer: B
Diff: 1 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

3) In investment banking the “spread” is the difference between
A) the value of a firm’s assets and the value of its liabilities.
B) the bid and asked prices on a bond.
C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market.
D) the price of a new stock issue and the price of an equivalent new bond issue.
Answer: C
Diff: 2 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

4) A syndicate is
A) a group of brokers illegally making use of insider information.
B) a group of commercial banks that agrees to accept the checks of each other’s depositors.
C) a group of investment banks underwriting a large security issue.
D) a group of dealers that markets a government bond issue.
Answer: C
Diff: 1 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

5) The due diligence process is
A) the process by which a firm chooses an investment bank.
B) when an investment bank researches a firm’s value.
C) how an investment bank underwrites large issues.
D) the review of a prospectus by the SEC.
Answer: B
Diff: 1 Page Ref: 347
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

6) What does it mean for an investment bank to conduct a “road show”?
A) It involves an investment bank marketing its services to firms considering new issues.
B) It is when an investment bank goes to the SEC to seek approval for a new issue.
C) It is when firms seeking an underwriter consider alternative investment banks.
D) It involves visits to institutional investors who might want to buy the security issue.
Answer: D
Diff: 1 Page Ref: 347
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

7) An important service provided by underwriters is
A) lowering of information costs.
B) dealing with problems of moral hazard.
C) insuring firms against loss from fire.
D) insuring firms against loss from employee theft.
Answer: A
Diff: 2 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking
8) Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?
A) credit risk
B) liquidity risk
C) principal risk
D) default risk
Answer: C
Diff: 2 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

9) Which of the following activities is NOT a primary concern of investment banks?
A) taking in deposits and making loans
B) providing advice and financing for mergers and acquisitions
C) underwriting new security issues
D) providing advice on new security issues
Answer: A
Diff: 1 Page Ref: 346
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking

10) The development of new financial securities or investment strategies using sophisticated models is known as
A) underwriting.
B) factoring.
C) financial engineering.
D) hedging.
Answer: C
Diff: 1 Page Ref: 348
Topic: investment banks
Objective: Explain how investment banks operate
*: Recurring
AACSB: Reflective Thinking