Financial Services: Securities Firms and Investment Banks: True / False Questions

Chapter 04 - Financial Services: Securities Firms and Investment Banks
Chapter 04
Financial Services: Securities Firms and Investment Banks
True / False Questions

1. Investment banks specialize in the origination, underwriting, and distribution of new

securities issued by corporations or governments.
TRUE
2. Investment banks engage in activities such as advising on mergers, acquisitions, and

corporate restructuring.
TRUE
3. Securities trading and underwriting is a profit generating activity that requires FIs to hold
an inventory of securities they trade.
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
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.
FALSE
6. The Financial Services Modernization Act of 1999 and other regulatory changes have been
the cause of the increase in interindustry mergers of investment banks and securities firms.
TRUE
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7. The number of investment banks and securities firms expanded rapidly from 1980 to
October 1987.
TRUE
8. As of October 1987, there were over 9,500 securities firms and investment banks.
TRUE
9. The value of assets is the traditional measure of size in the securities brokerage and
investment banking industry.
FALSE
10. As of 2015, income generated by securities brokerage accounted for over 25% of
commercial bank holding company fee income.
TRUE
11. As of 2015, there were over 4,500 securities firms in operation.

FALSE
12. National full-line investment banks and securities firms provide business services to both
retail and corporate customers.
TRUE
13. The objective of the investing function of securities firms (funds management) is to

allocate assets so that they outperform relative risk-return performance benchmark.
TRUE
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14. 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.
FALSE
15. 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.
FALSE
16. The top ten underwriters of global debt and equity issues represent over 70 percent of the
industry total in 2015.
FALSE
17. Generally, commission income for securities firms tends to increase as stock markets
increase in value and decline when stock markets decline.
TRUE
18. Since the recent financial crisis, the securities and investment banking industry has been
expanding and adding new lines of business.
FALSE
19. Recently (2013-2015), pre-tax profits at securities firms and investment banks have been
declining because of new regulation.
TRUE
20. Initial public offerings (IPOs) are first-time issues of firms whose equity has not
previously traded in an organized market.
TRUE
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21. 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.
FALSE
22. A best-efforts offering of a security is more risky for an investment bank than a firm
commitment offering.
FALSE
23. When conducting a firm commitment offering, the investment bank is acting as an agent
on behalf of the issuing company or government.
FALSE
24. Venture capital firms often make loans to finance new and often high-risk companies that
may have no business history.
FALSE
25. As compared to venture capital firms, private equity firms specialize in assisting existing
companies that have proven themselves in their industry.
TRUE
26. An angel venture capitalist is likely to be a wealthy individual that makes equity
investments in unsuccessful, bankrupt firms.
FALSE
27. In order to realize a return on their investment, venture capital firms eventually sell their
equity interest in a company they helped to fund.
TRUE
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28. Market making involves creating a primary market in a financial asset.

FALSE
29. Market makers in an NYSE stock are obligated to buy shares from sellers even when the
market for the stock is declining.
TRUE
30. Agency transactions of market makers are two-way transactions on behalf of customers.

TRUE
31. 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.
FALSE
32. Over the last 10 years, the number of floor traders on the NYSE has remained relatively
the same.
FALSE
33. Competition from internet-based and electronic exchanges has led to a decrease in profits
of market making.
TRUE
34. 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.
FALSE
35. Electronic brokerage allows an investor to have direct access to the trading floor.
TRUE
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36. Cash management accounts were an early attempt by commercial banks to provide

investment banking services to individuals.
FALSE
37. The Financial Services Modernization Act of 1999 allowed investment banks and
securities firms to offer deposit accounts to individuals.
TRUE
38. Cash management accounts did not exist before 1999.

FALSE
39. Investment banks are forbidden to offer traditional bank services including making small
business loans and the trading of loans.
FALSE
40. Recent trends indicate that securities firms are increasingly focused on providing client
services and downsizing proprietary trading products and services.
TRUE
41. Securities firms and investment banks engage in as many as seven key activity areas.
TRUE
42. 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
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43. Activity and performance trends in the investment banking industry are highly correlated
with general economic expansions and recessions.
TRUE
44. 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
45. The largest source of funding for securities firms and investment banks as an industry is
repurchase agreements.
TRUE
46. As of 2015, equity capital in the securities industry measured over 12 percent.
FALSE
47. The U.S.A. Patriot Act requires firms to implement processes to deter money laundering.
TRUE
48. The Security Investor Protection Corporation (SIPC) protects investors against losses of
up to $25,000,000 caused by the failure of a securities firm.
FALSE
49. Trades created by institutional orders that are carried out away from central exchanges are
called dark pools.
TRUE
50. As of 2015, 45 percent of all stock trades in the U.S. occurred through dark pools.
FALSE
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51. Seeking international partners is a recent trend among securities firms and investment
banks.
TRUE
52. Securities firms and investment banks are more involved internationally than other
member of the financial services industry.
TRUE

Multiple Choice Questions

53. By 2015, there were approximately ________ securities firms and investment banks
operating.
A. 9,100
B. 7,600
C. 1,200
D. 4,400
E. 220
54. 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.
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55. 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.
56. 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 the options.
57. 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. None of the options is correct.
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58. 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. complete 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.
59. 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.
60. 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. The securities 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 by
the SEC on publicly registered issues.
61. 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 the options is correct.
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62. 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.
63. The dominant form of institutional venture capital firms operate as a

A. Corporation.
B. Subsidiary of a financial company.
C. Bank holding company.
D. Limited partnership.
E. General partnership.
64. Venture capital firms assess two major issues when deciding to invest in a company.
Which of the following indicates these issues?
A. Company management and other funding secured by the company.
B. A proven company track record and the risk-return tradeoff of an investment.
C. Potential for a high return on investment and an easy exit strategy.
D. Funding requested and company financial statements.
E. Company's potential to generate profits and the funds available to the venture capital
company.
65. In market-making
A. principal transactions that are two-way transactions on behalf of customers, such as a
dealer working for a fee or commission.
B. principal transactions 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 that are two-way transactions on behalf of customers, such as a
dealer working for a fee or commission and principal transactions when market makers take
long or short positions and seek profits on price movements.
E. principal transactions that are two-way transactions on behalf of customers, such as a
dealer working for a fee or commission and market makers take inventory positions to
stabilize the market in the securities.
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66. 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.
67. 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. purchasing 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.
68. The largest category of assets for securities firms as of 2015 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.
69. The largest category of liabilities of securities firms as of 2015 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.
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70. In comparison to a typical commercial 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.
71. National full-line investment and securities 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. specialize more in corporate finance with very low activity in trading securities.
D. are more highly regulated than smaller firms.
E. are those owned by commercial banks.
72. 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.
73. 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.
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74. 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.
75. 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.
76. The primary advantage to the investor of a securities firm cash management account
(CMA) over commercial bank deposit accounts is that
A. no FDIC insurance is required on CMAs.
B. no regulatory oversight of CMAs.
C. they make it easier to buy and sell securities using funds from the CMA.
D. CMAs guarantee higher rates of return than money market deposit accounts.
E. Regulation Q interest rate ceilings do not apply to CMAs.
77. 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.
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78. 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.
79. 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.
80. 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.
81. Securities firms have equity ratios that are lower than those for commercial 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.
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82. Program trading involves

A. online trading services provided to customers by electronic trading securities firms.
B. computer-driven buying or selling of baskets of 15 or more stocks by institutional traders.
C. purchase and sale of assets that are potentially but not necessarily equivalent.
D. buying blocks of securities in anticipation of some information release.
E. providing a platform for customers to trade without the use of a broker.
83. Legislation designed to deter money laundering by implementing practices to identify and

verify those seeking to open an account were instituted by the
A. National Securities Markets Improvement Act of 1996.
B. Sarbanes-Oxley Act of 2002.
C. U.S.A. Patriot Act of 2003.
D. Financial Services Modernization Act of 1999.
E. Bank Holding Company Act of 1956.
84. The U.S.A. Patriot Act (2003) requires financial services firms to
A. verify the identity of any person seeking to open an account.
B. maintain records of the information used to verify a person's identity.
C. determine whether a person opening an account is on a list of suspected terrorists.
D. All of the options.
E. verify the identity of any person seeking to open an account and determine whether a
person opening an account is on a list of suspected terrorists.
85. The Securities Investor Protection Corporation (SIPC) protects investors against losses of
up to ____ on securities firm failures.
A. $100,000
B. $200,000
C. $500,000
D. $1,000,000
E. $25,000,000
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86. According to SEC Rule 415,

A. larger corporations can register their new issues with the SEC up to two years in advance.
B. firms should disclose soft dollar arrangements to their clients.
C. large investors are allowed to begin trading privately placed securities among themselves.
D. firms are required to maintain records of the information used to verify the identity of a
person opening an account.
E. publicly held companies must disclose all material information that might affect investment
decisions to all investors at the same time.
87. Identify a major reason behind the increase in domestic underwriting activity during the
1990s.
A. Enhanced non-trading profits.
B. High long-term interest rates.
C. Low long-term dividend rates.
D. Growth in the asset-backed securities market.
E. Decreased securitization of debt.
88. Which of the following is true about reverse repurchase agreements?

A. They are securities purchased under agreements to resell.
B. They account for less than 5 percent of assets of broker-dealers.
C. They amount to 40.8 percent of total liabilities and equity of broker-dealers.
D. They are treated as liabilities.
E. They are securities temporarily lent in exchange for cash received.
89. Which of the following is a self-regulatory organization involved in the day-to-day

regulation of trading practices?
A. Securities and Exchange Commission.
B. New York Stock Exchange.
C. Securities Investor Protection Corporation.
D. Chicago Board of Trade.
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90. Considering the securities firms and investment banking industries, The National
Securities Markets Improvement Act (NSMIA) of 1996
A. appointed the Federal Reserve System as the primary regulator of the industry.
B. diminished the role of the National Association of Securities Dealers (NASDs) in
regulating the industry.
C. allowed individual states the right to require registration of firms operating in the state.
D. effectively affirmed the SEC as the primary regulator of the industry.
E. required all firms in the industry to maintain minimum amounts of capital.
91. Functions of the Financial Industry Regulatory Authority (FINRA) include all of the
following EXCEPT
A. Closing securities firms and investment banks that violate its regulations.
B. Authoring the rules that govern the activities of securities firms.
C. Works to support investor education.
D. Examines securities firms for compliance with regulation.
E. Enforcing the rules governing the activities of securities firms.
92. The primary function of the Security Investor Protection Corporation (SIPC) is to
A. investigate member securities firms.
B. regulate member securities firms.
C. prosecute cases of fraud within securities firms.
D. oversee accounting practices of securities firms and investment banks.
E. Restore customer cash and securities of bankrupt or insolvent securities firms.
93. Which of the following 2 firms survived as investment banks following the most recent
financial crisis?
A. Morgan Stanley and Bear Stearns.
B. Goldman Sachs and Merrill Lynch.
C. Lehman Brothers and Morgan Stanley.
D. Merrill Lynch and Lehman Brothers.
E. None of the options.
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94. Which of the following investment banks is no longer in business as a result of the most
recent financial crisis?
A. Morgan Stanley.
B. Bear Stearns.
C. Lehman Brothers.
D. Goldman Sachs.
E. Merrill Lynch.
95. Which of the following two investment banks were acquired by financial services holding
companies during the most recent financial crisis?
A. Merrill Lynch and Bear Stearns.
B. Goldman Sachs and Morgan Stanley.
C. Bear Stearns and Lehman Brothers.
D. Merrill Lynch and Morgan Stanley.
E. Lehman Brothers and Goldman Sachs.
96. Which of the following two investment banks were granted approval to be chartered as
commercial banks during the most recent financial crisis?
A. Merrill Lynch and Bear Stearns.
B. Goldman Sachs and Morgan Stanley.
C. Bear Stearns and Lehman Brothers.
D. Merrill Lynch and Morgan Stanley.
E. Lehman Brothers and Goldman Sachs.
97. As of 2015, approximately ________ of the industry total brokerage fee income was
generated by firms operating as subsidiaries of commercial bank holding companies.
A. 15 percent
B. 25 percent
C. 40 percent
D. 50 percent
E. 65 percent
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98. As of 2015, approximately ________ of the industry total brokerage fee income was
generated by firms operating as subsidiaries of commercial bank holding companies.
A. $12.1 billion
B. $10.3 billion
C. $16.5 billion
D. $32.4 billion
E. $40.3 billion
99. One of the primary reasons that investment banks were allowed to convert to bank holding
companies during the recent financial crisis was recognition that
A. their operating activities were too risky and they needed the cushion of bank deposits to
alleviate funding risks.
B. the industry had acquired too much capital during the previous decade.
C. bank holding companies needed the ability to underwrite new issues of corporate
securities.
D. it was the only way an investment bank could qualify for federal bailout funds.
E. the Federal Reserve was unable to purchase troubled assets from investment banks, but
they could from bank holding companies.
An investment banker agrees to underwrite an issue of 10 million shares of stock for
TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share
to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public
for $11.20 per share.
100. How much money does TWResearch receive?

A. $105,000,000.
B. $150,000,000.
C. $112,000,000.
D. $125,000,000.
E. $110,000,000.
TWResearch, Inc. will receive $10.50 per share ´ 10,000,000 shares = $105,000,000.

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101. What is the profit (loss) to the investment banker?

A. Profit of $1,000,000.
B. Profit of $2,000,000.
C. Profit of $7,000,000.
D. Loss of $7,500,000.
E. Loss of $1,000,000.
The investment banker will have a profit of $7,000,000.

($11.20 - $10.50) ´ 10,000,000 shares = $0.70 per share ´ 10,000,000 = $7,000,000.

102. If the investment bank can sell the shares for $9.75 per share, how much money does
TWResearch receive?
A. $105,000,000.
B. $150,000,000.
C. $112,000,000.
D. $125,000,000.
E. $110,000,000.
This is a firm commitment offering, so TWResearch still receives $105,000,000

$10.50 per share ´ 10,000,000 shares.

103. If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to
the investment banker?
A. Profit of $1,000,000.
B. Loss of $7,500,000.
C. Profit of $7,000,000.
D. Loss of $7,000,000.
E. Loss of $1,000,000.
The investment banker will have a loss of $7,500,000

($9.75 - $10.50) ´ 10,000,000 = -$7,500,000.

Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million
shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold.
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104. How much money does Rochester Industries receive?

A. $15,000,000.
B. $84,000,000.
C. $76,200,000.
D. $82,200,000.
E. $110,000,000.
Rochester Industries receives $82,200,000

($10.50 - $0.225) ´ 8,000,000 = $10.275 ´ 8,000,000 = $82,200,000.

105. What is the profit to the investment banker if it is able to sell 8 million shares for $10.50
per share?
A. Profit of $1,000,000.
B. Loss of $7,500,000.
C. Profit of $7,000,000.
D. Loss of $7,000,000.
E. Profit of $1,800,000.
The profit to the investment banker is $1,800,000

$0.225 per share ´ 8,000,000 shares sold = $1,800,000.

106. If the investment bank sells 8 million shares for $9.75 per share, how much money does
Rochester Industries receive?
A. $76,200,000.
B. $84,000,000.
C. $105,000,000.
D. $82,200,000.
E. $78,000,000.
At a price of $9.75, Rochester Industries receives $76,200,000

($9.75 - 0.225) ´ 8,000,000 = $9.525 per share ´ 8,000,000 shares = $76,200,000.

107. What is the profit to the investment banker it sells 8 million shares for $9.75 per share?
A. Profit of $1,000,000.
B. Loss of $7,500,000.
C. Profit of $7,000,000.
D. Loss of $7,000,000.
E. Profit of $1,800,000.
At a price of $9.75, the profit to the investment banker is unchanged since the compensation relies only on the number of
shares sold.
$0.225 per share ´ 8,000,000 = $1,800,000.

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108. If the investment bank were able to sell all 10 million shares for $12.75 per share, how
much money does Rochester Industries receive?
A. $127,500,000.
B. $125,250,000.
C. $105,675,000.
D. $102,000,000.
E. $99,000,000.
Rochester Industries would receive $125,250,000 if 10,000,000 shares were sold for $12.75 per share.
($12.75 - 0.225) ´ 10,000,000 = $12.525 per share ´ 10,000,000 shares = $125,250,000.

109. What would be the profit to the investment banker it were able to sell all 10 million
shares for $12.75 per share?
A. Profit of $2,250,000.
B. Loss of $7,500,000.
C. Profit of $7,500,000.
D. Loss of $3,000,000.
E. Profit of $3,750,000.
The investment banker would earn $2.250.000

$0.225 per share ´ 10,000,000 shares = $2,250,000.

NetChoice, Inc. on a firm commitment basis. The investment banker pays $31.50 per share to
NetChoice, Inc. for the 5 million shares of stock. It then sells those shares to the public for
$30.00 per share.
110. How much money does NetChoice, Inc. receive?

A. $150,000,000.
B. $157,500,000.
C. $112,000,000.
D. $125,000,000.
E. $105,000,000.
NetChoice will receive $157,500,000

$31.50 per share ´ 5,000,000 shares = 157,500,000.

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111. What is the profit (loss) to the investment banker?

A. Profit of $7,500,000.
B. Profit of $2,000,000.
C. Profit of $7,000,000.
D. Loss of $7,500,000.
E. Loss of $2,000,000.
The investment bank will lose $7,500,000

($30.00 - 31.50) ´ 5,000,000 = -$1.50 per share ´ 5,000,000 = ($7,500,000).

112. If the investment bank can sell the shares for $34 per share, how much money does
NetChoice, Inc. receive?
A. $150,000,000.
B. $157,500,000.
C. $112,000,000.
D. $125,000,000.
E. $105,000,000.
It is a firm commitment offering so regardless of what the public pays, NetChoice receives $31.50 per share,
$31.50 per share ´ 5,000,000 shares = $157,500,000.

113. If the investment bank can sell the shares for $34 per share, what is the profit (loss) to the
investment banker?
A. Profit of $12,500,000.
B. Profit of $10,000,000.
C. Profit of $7,000,000.
D. Loss of $7,500,000.
E. Loss of $12,500,000.
At $34 per share, the investment bank makes a profit of $12,500,000.

($34.00 - $31.50) ´ 5,000,000 = $2.50 per share ´ 5,000,000 shares = $12,500,000.

NetChoice, Inc. on a best-efforts basis. The investment banker is able to sell 4.5 million
shares for $31.00 per share and it charges NetChoice, Inc. $0.375 per share sold.
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114. How much money does NetChoice, Inc. receive?

A. $139,500,500.
B. $137,812,500.
C. $155,000,000.
D. $153,125,000.
E. $105,000,000.
NetChoice receives
($31.00 - $0.375) ´ 4,500,000 = $30.625 per share ´ 4,500,000 shares = $137,812,500.

115. What is the profit to the investment banker if it is able to sell 4.5 million shares for $31
per share?
A. Profit of $1,875,000.
B. Loss of $1,275,000.
C. Profit of $1,687,500.
D. Loss of $3,125,000.
E. Profit of $3,125,500.
Profit to investment bank is $0.375 per share ´ $4,500,000 shares = $1,687,500.

116. If the investment bank sells 4.5 million shares for $29 per share, how much money does
NetChoice, Inc. receive?
A. $145,000,000.
B. $130,500,000.
C. $143,125,000.
D. $128,812,500.
E. $115,762,500.
At $29.00 per share NetChoice receives

($29.00 - $0.375) ´4,500,000 = $28.625 per share ´ 4,500,000 shares = $128,812,500.

117. What is the profit to the investment banker it sells 4.5 million shares for $29 per share?
A. Profit of $1,687,500.
B. Loss of $2,487,500.
C. Profit of $1,875,000.
D. Loss of $3,125,000.
E. Profit of $3,125,500.
At a price of $29.00, the profit to the investment banker is unchanged since the compensation relies only on the number of
shares sold.
$0.375 per share ´ 4,500,000 = $1,387,500.

4-29
118. If the investment bank were able to sell all 5 million shares for $35, how much money
would NetChoice, Inc. receive?
A. $195,675,000.
B. $187,500,000.
C. $130,250,000.
D. $175,000,000.
E. $173,125,000.
All 5 million shares sold for $35.00 per share would provide NetChoice $173,125,000
($35.00 - $0.375) ´ 5,000,000 = $34.625 ´ 5,000,000 = $173,125,000.

119. What is the profit to the investment banker if all 5 million shares were sold for $35 per
share?
A. Profit of $1,275,000.
B. Loss of $1,875,000.
C. Profit of $1,875,000.
D. Loss of $3,125,000.
E. Profit of $3,125,500.
The investment bank would receive $1,875,000

$0.375 per share ´ 5,000,000 shares = $1,875,000.

4-30

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Chapter 04 - Financial Services: Securities Firms and Investment Banks

True / False Questions

1. Investment banks specialize in the origination, underwriting, and distribution of new

2. Investment banks engage in activities such as advising on mergers, acquisitions, and

5. Securities underwriting and trading is an activity that requires a considerable investment in

11. As of 2015, there were over 4,500 securities firms in operation.

13. The objective of the investing function of securities firms (funds management) is to

28. Market making involves creating a primary market in a financial asset.

30. Agency transactions of market makers are two-way transactions on behalf of customers.

36. Cash management accounts were an early attempt by commercial banks to provide

38. Cash management accounts did not exist before 1999.

Multiple Choice Questions

55. Which of the following differentiates securities firms from investment banks?

57. Which of the following is true?

59. Which of the following is most typical of broker-dealers?

60. Which of the following is true of private placement of securities?

61. The function of institutional venture capital firms is to

62. A corporate venture capital firm

63. The dominant form of institutional venture capital firms operate as a

66. Which of the following is NOT considered a trading activity of securities firms?

67. Pure arbitrage trading involves

68. The largest category of assets for securities firms as of 2015 was

69. The largest category of liabilities of securities firms as of 2015 was

70. In comparison to a typical commercial bank, an investment bank is likely to have

71. National full-line investment and securities firms

75. Offering bank deposit-like accounts to individual customers by a securities firm involves

82. Program trading involves

83. Legislation designed to deter money laundering by implementing practices to identify and

86. According to SEC Rule 415,

88. Which of the following is true about reverse repurchase agreements?

89. Which of the following is a self-regulatory organization involved in the day-to-day

100. How much money does TWResearch receive?

101. What is the profit (loss) to the investment banker?

The investment banker will have a profit of $7,000,000.

This is a firm commitment offering, so TWResearch still receives $105,000,000

The investment banker will have a loss of $7,500,000

104. How much money does Rochester Industries receive?

Rochester Industries receives $82,200,000

The profit to the investment banker is $1,800,000

At a price of $9.75, Rochester Industries receives $76,200,000

The investment banker would earn $2.250.000

110. How much money does NetChoice, Inc. receive?

NetChoice will receive $157,500,000

111. What is the profit (loss) to the investment banker?

The investment bank will lose $7,500,000

At $34 per share, the investment bank makes a profit of $12,500,000.

114. How much money does NetChoice, Inc. receive?

Profit to investment bank is $0.375 per share ´ $4,500,000 shares = $1,687,500.

At $29.00 per share NetChoice receives

The investment bank would receive $1,875,000

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