Chapters 16 and 17 509

Chapter 16

True/False Questions

1. For securities firms, income from investment management is more stable than the income from underwriting or trading.

Answer: True Page: 457 Level: Medium

2. Full line investment banks act as both broker dealers and securities underwriters.

Answer: True Page: 455 Level: Easy

3. A private placement is allowed under SEC Rule 415 to allow large corporations to preregister an upcoming security offering for up to two years in advance.

Answer: False Page: 458 Level: Medium

4. Issuers of privately placed securities must still register the issue with the SEC.


5. In a best efforts offering the investment banker acts as an agent for the issuer rather than as a principle.


6. A market maker buys IBM at $185 for his own account and sells the stock later in the day at $187. He is acting as a broker in this transaction.

Answer: False Page: 460-461 Level: Easy

7. Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

Answer: False Page: 461 Level: Easy

8. An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices.


9. A stock broker acts as a principle on behalf of the customer.


10. Securities firms often provide deposit type services through cash management accounts.


11. Program trading is the simultaneous buying and selling of at least $1 million worth of at least 15 stocks.


12. The major source of funds for securities firms are repurchase agreements.

Answer: True Page: 466-467 Level: Easy

13. Equity capital levels of securities firms are higher than for banks since securities firms cannot offer insured deposits.


14. One could argue that decimalization has cut dealer profit margins but may have helped increase broker profits.

Answer: True Page: 461 Level: Difficult

15. The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000.


16. In the recent past, stock research analysts received bonuses for generating allegedly biased research reports that helped to sell new issues underwritten by their firm.

Answer: True Page: 463,468 Level: Easy

17. Total dollar value of debt underwriting exceeded total equity underwriting dollar volume in every year from 1990 to 2001.


Multiple Choice Questions

18. Full line securities firms engage in all but one of the following A) Trading and brokerage of existing securities B) Corporate restructuring and advice C) Issuing new securities D) Raising money via insured deposits

Answer: D Page: 453-454 Level: Easy

19. A best efforts offering is one where A) The underwriter bears the risk of an unsuccessful offering. B) The bid-ask spread is exceptionally high, but the investment banker does their

best to sell the issue anyway. C) The investment banker acts as a principle for the issuer. D) The investment banker acts only as a distribution agent. E) The issue can only be privately placed.

Answer: D Page: 459 Level: Easy

20. If an underwriter overestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Sell the shares back to the issuing firm at a discount. B) Lower the bid price to the issuing firm. C) Increase the fees charged to the issuing firm. D) Cancel the issue and refund the fees paid by the issuing firm. E) None of the above

Answer: E Page: 459 Level: Medium

21. If an underwriter underestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Raise the offer price to the public B) Lower the bid price to the issuing firm C) Increase the fees charged to the issuing firm D) Cancel the issue E) None of the above


22. Investment firms that pool money from individuals and/or institutions and invest equity funds in startup firms are called A) Top tier bankers B) Section 20 affiliates C) Venture capital firms D) ECNs E) Discount brokerage houses

Answer: C Page: 456 Level: Easy

23. You buy French Francs in New York and simultaneously sell them in Frankfurt for a gain. This is an example of A) Position trading B) Program trading C) Pure arbitrage D) Risk arbitrage E) Hedging

Answer: C Page: 461 Level: Medium

24. An unregistered issue sold to a few large institutional buyers is an example of a A) Best efforts offering B) Fully underwritten public offering C) Shelf offering D) Private placement E) SEC Rule 415 offering

Answer: D Page: 468 Level: Medium

25. An investment banker agrees to a firm commitment offering of 1 million shares of Ace stock. The offer price is set at $45 and the spread is 50 cents per share. If the stock is actually sold to the public at $44 however, what is the investment banker's gain or loss? A) $1,000,000 gain B) $1,000,000 loss C) $500,000 gain D) $500,000 loss E) None of the above


26. Day to day trading practices of securities firms currently may be regulated by which of the following?I. NASDII. SECIII. NYSEIV. SIPC A) I only B) II only C) I and II only D) I and III only E) II and IV only


27. Firms in the securities industry are required to maintain a minimum capital to asset ratio of _____ A) 2% B) 4% C) 6% D) 8% E) 10%

Answer: A Page: 467 Level: Medium

28. In 2000 and 2001 the top IPO underwriter (by $ volume) was A) Goldman-Sachs B) Merrill-Lynch C) Citigroup SSB D) J.P. Morgan Chase E) UBS Warburg

Answer: B Page: 458 Level: Easy

29. The major result of NSMIA was to A) Reduce state regulatory powers over securities firms B) Establish the SIPC C) Create the NASD D) All of the above E) None of the above

Answer: A Page: 467-468 Level: Easy

30. The largest source of funds for a securities firm is A) Short positions in securities and commodities B) Payables to other broker dealers C) Securities sold under repurchase agreement D) Call loans E) Securities purchased under agreements to sell


31. _____________ are examples of investment bankers offering traditional commercial banking services. A) Online brokers B) Cash management accounts C) Underwriting corporate debt and equity offers D) Venture capital funds E) Mergers and acquisition services

Answer: B Page: 462 Level: Medium

32. An investment banker may be unwilling to engage in a firm commitment offer if A) The issuer is relatively unknown to the public B) The issuer desires too low an offer price C) The investment banker is concerned about overall market price volatility D) Both A and C E) Both B and C


33. When an underwriter engages in a firm commitment, the underwriter is acting as A) A principle B) An agent C) An asset transformer D) An M&A advisor E) All of the above

Answer: A Page: 459 Level: Easy

34. Underwriter spreads will normally be larger on A) A shelf offering than on an IPO B) A best efforts offer than on an IPO C) A best efforts offer than on a seasoned offering D) An IPO than a seasoned offering E) Less risky issues


35. In July 2002 the U.S. Congress passed the Corporate Governance and Accounting Oversight bill. Among other things, this billI. Created an independent auditing oversight board run by the SECII. Increased penalties for corporate wrongdoersIII. Eliminated the use of stock options for executive compensation A) I only B) I and II only C) I and III only D) II and III only E) I, II and III


36. From 1991 to 2001, foreign investor transactions in U.S. securities ___________ and U.S. investor transactions in foreign securities ______________. A) increased ; increased B) increased ; decreased C) decreased ; increased D) decreased ; decreased E) increased ; stayed the same


37. The SEC primarily sets standards to regulate securities firms' A) Program trading and arbitrage strategies B) M&A and cash management activities C) Profitability and holding companies activities D) Trading and underwriting activities E) Corporate advisory and M&A activities

Answer: D Page: 467-468 Level: Medium

Chapter 16


1. Because of the differences in the makeup of their major loan types, finance companies typically have shorter term loans than banks.


2. The twenty largest finance companies own about 80% of the industry's assets.


3. The first major finance company was formed by Filene's Basement to service the credit needs of its employees.


4. An installment loan is one where all the principle is repaid at maturity.


5. As of 2000, the largest finance company was General Motors Acceptance Corporation.


6. The largest commercial mortgage lender in the U.S. is a finance company.


7. Sales finance institutions specialize in loan sales to banks and thrifts.


8. Except for certain special promotional deals, finance companies generally charge higher rates for similar loans than do commercial banks.


9. It is generally impossible to get a mortgage loan if you have a bankruptcy on your credit record, even from a subprime lender.


10. Finance companies are now the largest issuers in the country in the short term banker's acceptance market.



11. Which of the following are not sources of funds for finance companies? A) Bank loans B) Commercial paper C) Equity D) Deposits E) Neither C) or D) are sources of funds for a finance company


12. Finance company loss reserves will typically be _____ percent of assets than/as a bank's loss reserves. A) A higher B) A lower C) An equal

Answer: A Page: 480-481 Level: Easy

13. Finance company services include A) Consumer lending B) Business lending C) Mortgage lending D) All of the above E) A. and B. only


14. The first major finance company was A) General Motors Acceptance B) Household Finance Corp C) General Electric Capital Corp D) First Alliance Company E) Metrics Companies


15. A finance company makes a 48 month $15,000 installment loan to a customer. If the annual rate is quoted at 9%, which of the following monthly payments is correct? A) $138.89 B) $373.28 C) $1,371.92 D) $444.21 E) None of the above


16. A subprime lender makes a loan to a customer. The customer is given $9000 today and she must then make twelve monthly installment payments of $860 (beginning in one month) to the lender. What rate must be quoted to the customer? A) 21.46% B) 26.05% C) 217.10% D) 32.24% E) 29.40%


17. Factoring is A) Equipment leasing B) Servicing mortgage factors C) Purchasing corporate accounts receivables at a discount D) Financing automobile purchases E) Making installment loans to customers


18. Sales finance companies A) Specialize in making loans to customers of a specific retailer or manufacturer B) Specialize in making installments and other loans to whatever consumers are

interested C) Specialize in providing loans to businesses D) Specialize in international factoring and forfaiting E) None of the above


19. In recent years the fastest growing area of business at finance companies has been in A) Auto lending B) Unsecured consumer loans C) Mortgages D) Leasing and business lending E) None of the above

Answer: D Page: 476-477 Level: Medium

20. A finance company that makes loans to high risk customers is called a A) Subprime leader B) Commercial bank C) Factor D) Warehouse lender E) Supraprime lender


21. A lender that loans money and charges usurious interest rates and/or fees with no credit checks is called a(n) A) Ebeneezer B) Greenmailer C) Land shark D) Bird of prey E) Loan shark

Answer: E Page: 478 Level: Easy

22. Finance companies enjoy several advantages over banks. These include all but which one of the following? A) Finance companies can offer various types of products and services without

regulatory interference. B) Many finance companies have considerable knowledge and expertise about

specific industries and products. C) Finance companies can accept riskier customers than banks. D) Finance companies generally have lower overhead than banks. E) Finance companies have lower funds costs than banks.

Answer: E Page: 476-477 Level: Medium

23. As compared to banks, the typical finance company loan portfoliosI. Have a lower percentage of mortgagesII. Are shorter termIII. Have higher credit risk A) I only B) II only C) II and III only D) I and III only E) I, II and III


24. Which of the following do finance companies use to signal their safety and solvency to users? A) Government insurance B) Substantial equity to asset ratios C) Letters of credit from high quality banks D) A. and B. E) B. and C.


25. A captive finance company is one that A) Is owned by a retailer or manufacturer B) Is owned by a bank holding company C) Is owned by it depositors D) Lends only to high risk individuals that cannot obtain loans elsewhere (i.e.

captives) E) Is regulated at the Federal level


26. A local finance company allows you to give them a postdated check not cashable for two weeks for $100. In return they give you $90 today. What annual rate must be disclosed on this loan? A) 11.11% B) 288.89% C) 1447.73% D) 577.72% E) 29.00%

Answer: B Page: None Level: Difficult

27. A loan agreement between Ford Motor Credit and a local Ford dealer is an example of A) Retail motor vehicle loan B) Business equipment loan C) Factoring of receivables D) Depreciation loan E) None of the above


28. The largest full service financial institution in the country that includes a finance company is A) Citigroup B) General Electric Capital Services C) General Motors Acceptance Corporation D) American Express E) CIT Group Holdings


29. Although finance company growth has generally been positive for the last ten years _______ _________ finance companies have recently been struggling. A) Business and captive B) Consumer and wholesale C) Subprime and electronic D) Mortgage and subprime E) Sales and business


30. Finance companies in foreign countries A) Usually take insured deposits B) Rarely offer loans to individuals C) Raise most of their capital via issuing commercial paper D) Are more highly regulated than U.S. finance companies E) Are usually subsidiaries of local banks and dependent on their parents for

capital


Chapter 17


1. Over the last ten years the number of banks has been declining, but the number of mutual funds has been growing.


2. Net new cash flows to money market mutual funds vary inversely with interest rate spreads on money market funds and savings deposits.


3. Most of the recent growth of long term mutual funds has occurred because of the bull market of the 1990s.


4. As of 2001 total U.S. mutual fund assets exceeded U.S. insurer's assets but were less than commercial bank total assets.


5. The shares of a closed end fund with market value of assets of $200 million and 2 million shares outstanding will always trade at a market value of $100 per share.


6. If invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5% load you will receive less than 200 shares in the fund.


7. The typical household that owns mutual funds owns no more than 3 mutual funds.


8. Each fund's prospectus is required to disclose the fund's beta risk and total risk.


9. The market value of a fund's net assets divided by the number of mutual fund shares outstanding is called the NAV of the fund.


10. Open end fund shares often trade at a discount or premium relative to NAV.


11. Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc.

Answer: False Page: 497-498 Level: Easy

12. A 12 b-1 fee is an implicit load charge.


13. Of long term equity funds, municipal funds and growth and income funds are the largest categories.


14. A drop in interest rates will usually result in an increase in the number of money market mutual fund shares.


15. The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry.



16. Open end mutual funds guarantee A) Investors a minimum rate of return B) Investors a minimum NAV C) To redeem investor's shares upon demand at current NAV D) To earn the rate promised in the prospectus E) None of the above


17. As compared to purchasing a stock, a no load mutual fund investor will usually get A) Commissionless reinvestment opportunities B) Better diversification C) Free switching between funds within the same family D) Lower commissions costs E) All of the above

Answer: E Page: 486 Level: Easy

18. Money market mutual funds invest primarily in A) Foreign currencies B) Real estate C) Long term bonds D) IPOs E) None of the above


19. In terms of asset size, rank the top three U.S. financial intermediaries from largest to smallest.I. Commercial banksII. State and local government pension fundsIII. Private pension fundsIV. Mutual funds A) I, IV, III B) I, III, II C) IV, I, II D) I, II, IV E) II, III, I


20. As the economy weakens, one would expect investment in _________ funds to increase and investment in __________ funds to decrease, ceteris paribus. A) Money market mutual; equity B) Equity; bond C) Municipal bond; money market mutual D) Corporate bond; Municipal bond E) Long term; short term


21. Hybrid mutual funds normally invest significant amounts in A) Common stock B) Commercial paper C) Long term bonds D) Treasury bills E) Both A) and C)

Answer: E Page: 488-489 Level: Medium

22. During 2001 investment in money market mutual funds _____ and the investment in long term mutual funds ____. A) Decreased; decreased B) Increased; increased C) Increased; decreased D) Decreased; increased E) Stayed the same; increased


23. Money market mutual funds (MMMFs) have caused disintermediation at banks. This is because MMMFs A) Allow investors access to higher interest rate money market securities with a

relatively small capital investment B) Are less risky than bank deposits C) Are now federally insured, like bank deposits D) Offer guaranteed rates of return E) None of the above

Answer: A Page: 489-490 Level: Medium

24. The 'profile' of the typical mutual fund owners implies that he or she is a:I. Long term investorII. Generation XerIII. EmployedIV. College graduate A) III only B) I and III only C) II, III and IV only D) I, III and IV only E) I, II, III and IV


25. By type of fund, there are more _____ funds than any other. A) Equity B) Bond C) Taxable money market D) Tax exempt money market E) Hybrid


26. The largest proportion of long term mutual fund assets are held by _____ and the largest proportion of money market mutual fund assets are held by _____. A) Bank trusts and estates, the household sector B) The household sector, private pension funds C) The household sector, the household sector D) Private pension funds, nonfinancial corporate business E) Life insurance firms, funding corporations


27. The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the A) Load charge B) NAV C) Expense ratio D) 12b-1 fee E) Management fee


28. Rank the following types of funds from most risky to least risky (variations exist but rank them generally)I. GrowthII. Growth and incomeIII. Money market mutual fundIV. Bond fund A) II, I, III, IV B) I, II, IV, III C) I, IV, II, III D) II, III, I, IV E) III, IV, II, I


29. You have $5,000 to invest and you are considering investing in Fund A. The fund charges a 5.5% load and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's rate of return will be 10% per year. If you make the investment what should your investment be worth in one year? A) $5,135.48 B) $5,197.50 C) $5,500.00 D) $5,431.25 E) $5,162.50

Answer: A Page: 498 Level: Difficult Response: Investment amount = $5,000*(1-0.055) = $4,725; FV1:$4,725*1.10 = $5,197.5; Average assets = ($4,725+$5,197.5)/2 = 4,961.25; $4,961.25*0.0125= $62.01; $5,197.5 – $62.01=$5,135.48

30. A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be A) An open ended fund B) A closed end fund C) A balanced fund D) An aggressive growth fund E) A money market mutual fund


31. An open end mutual fund owns 1000 share of Krispy Kreme priced at $40. The fund also owns 2000 shares of Ben & Jerry's priced at $55, and 1000 shares of Pepsi priced at $45. The fund itself has 3000 of its own shares outstanding. What is the NAV of a fund's share? A) $65 B) $55 C) $45 D) $35 E) $25

Answer: A Page: 495 Level: Medium Response: [(1000*40) + (2000*55) + (1000*45)] / 3000 fund shares

32. You have $8,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 5.5% load, a 1% management fee and a 0.25% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year end assets. The gross annual return on the fund's shares was 12%. What was your net annual rate of return to the nearest basis point? A) 3.26% B) 6.50% C) 6.25% D) 4.52% E) 4.02%

Answer: D Page: 497-498 Level: Difficult Response: {{[$8,000*(1-0.055) *1.12] * (1-0.0125)} / $8,000} – 1

33. Investors pay load changes to receive A) Higher returns on their investments B) Additional services from funds C) Voting shares of stock D) Advice on which fund to buy E) 12B-1 remunerations


34. A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen? A) The fund's NAV will rise from $100 to $105 B) The fund's NAV per share will rise from $1 to $1.05 C) The fund will issue a total of 5 new shares D) The fund's NAV will fall 5% E) The fund will close to new investors


35. The primary regulator of mutual funds is the A) NASD B) CFTC C) NYSE D) SEC E) NSMIA


Documents

Chapters 16 and 17 509