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Investment Banks and Securities
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Investment Banks and Securities

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Questions and Answers

What is the primary function of an investment bank according to the text?

  • Facilitating the creation of capital for companies, government, and other entities (correct)
  • Operating as a regular retail bank for everyday transactions
  • Selling insurance products to individual savers
  • Providing loans to individuals and small businesses

    • What is the purpose of a legal document containing information about the issuer in the context of investment banking?

  • To list out the company's technological innovations
  • To disclose information to potential investors about the issuer (correct)
  • To outline the company's marketing strategy
  • To provide details about the company's management team

    • What does 'Underwriting' refer to in the context of investment banking?

  • The process of market-making for new securities
  • Conducting mergers and acquisitions for companies
  • Taking on the risk of selling a new issue of securities at a specified price (correct)
  • Client-related trading activities

    • In the investment banking context, what is the purpose of a 'Road Show'?

    <p>To introduce potential investors to company management and investment bankers</p> Signup and view all the answers

    What does 'Settlement Risk' refer to in an investment banking transaction?

    <p>The risk that the other side of the transaction will fail to deliver as promised</p> Signup and view all the answers

    What does 'Gross Spread' signify in an underwriting context in investment banking?

    <p>The fee charged by the underwriter for selling securities</p> Signup and view all the answers

    What is the role of an investment bank in relation to bringing new securities to the market?

    <p>Acting as a broker between investors and companies</p> Signup and view all the answers

    What distinguishes a 'Seasoned Offering' from an 'Initial Public Offering (IPO)'?

    <p>IPOs involve the first-time sale of a company's stock to the public, while seasoned offerings are subsequent sales.</p> Signup and view all the answers

    What is the significance of a 'Firm Commitment' in the context of underwriting?

    <p>The investment bank makes a commitment to buy all the securities at a specified price regardless of market demand.</p> Signup and view all the answers

    How does a 'Private Placement' differ from a 'Public Offering'?

    <p>Private placements do not require regulatory approval, while public offerings need SEC approval.</p> Signup and view all the answers

    What does a 'Syndicate' typically refer to in an investment banking context?

    <p>A network of investment banks that work together to underwrite and sell new securities</p> Signup and view all the answers

    'Market-making' is a key function performed by investment banks. What does this activity involve?

    <p>Actively trading securities for their own account to provide liquidity to the market</p> Signup and view all the answers

    What is the role of a syndicate in the context of investment banking underwriting?

    <p>To assist in marketing and distributing new securities to investors</p> Signup and view all the answers

    In the context of investment banking, what does 'Proprietary Trading' involve?

    <p>Buying and selling securities using the bank's own funds</p> Signup and view all the answers

    What does 'Best efforts bid' signify in an investment banking context?

    <p>The underwriter attempts to sell the securities without guaranteeing the full amount will be sold</p> Signup and view all the answers

    What is the purpose of an investment bank conducting a 'Road Show'?

    <p>To market a company's securities to potential investors</p> Signup and view all the answers

    What is the significance of 'Underwriting Syndicate' in an investment banking context?

    <p>It helps in marketing and distributing new securities to investors</p> Signup and view all the answers

    In investment banking, what does 'Settlement Risk' refer to?

    <p>Risk related to the delivery of securities or funds in a transaction</p> Signup and view all the answers

    An investment bank's function includes bringing new securities to the market through activities like underwriting and market-making.

    <p>True</p> Signup and view all the answers

    In a seasoned offering, securities are offered for the first time to the public.

    <p>False</p> Signup and view all the answers

    Proprietary trading is not a common function performed by investment banks.

    <p>False</p> Signup and view all the answers

    Best efforts bid in underwriting means the underwriter commits to buying all the securities at a specified price.

    <p>False</p> Signup and view all the answers

    Settlement risk in an investment banking transaction arises when the other party fails to deliver.

    <p>True</p> Signup and view all the answers

    A legal document containing information about the issuer is typically provided during a road show conducted by an investment bank.

    <p>False</p> Signup and view all the answers

    An investment bank's function of 'market-making' involves creating capital for companies by bringing new securities to the market.

    <p>False</p> Signup and view all the answers

    In a seasoned offering, securities are sold to the public for the first time.

    <p>False</p> Signup and view all the answers

    During a road show conducted by an investment bank, potential investors meet with the company's management and investment banker.

    <p>True</p> Signup and view all the answers

    In underwriting, a 'best efforts bid' means the underwriter commits to buying all the securities at a specified price.

    <p>False</p> Signup and view all the answers

    Proprietary trading is one of the key functions performed by investment banks.

    <p>True</p> Signup and view all the answers

    Settlement risk in an investment banking transaction arises when both parties fulfill their obligations as per the agreement.

    <p>False</p> Signup and view all the answers

    When a firm sells securities to investors in the primary market, it is the only time the firm receives money in return for its securities.

    <p>True</p> Signup and view all the answers

    Debt and equity are the two basic categories of investment alternatives available in the securities markets.

    <p>True</p> Signup and view all the answers

    Firms that borrow money by selling equity securities are considered to be issuing debt securities.

    <p>False</p> Signup and view all the answers

    The cash earned from a firm's investments is usually distributed to shareholders as dividends.

    <p>False</p> Signup and view all the answers

    Market-making is a function typically performed by commercial banks rather than investment banks.

    <p>False</p> Signup and view all the answers

    Securities sold to the public for the first time are considered part of a seasoned offering.

    <p>False</p> Signup and view all the answers

    Equity securities represent ownership of the corporation.

    <p>True</p> Signup and view all the answers

    Bonds with a maturity longer than 10 years are typically referred to as notes.

    <p>False</p> Signup and view all the answers

    Interest payments for bonds with fixed interest rates never change over the bond's lifetime.

    <p>True</p> Signup and view all the answers

    A bond with a face value of PHP1,000 and an 8 percent coupon rate will pay PHP80 per year in interest.

    <p>True</p> Signup and view all the answers

    Preferred stock is an example of a debt security.

    <p>False</p> Signup and view all the answers

    In investment banking, money market securities are typically sold in the capital market.

    <p>False</p> Signup and view all the answers

    Common stock provides a promised set of interest payments and a schedule for the repayment of principal.

    <p>False</p> Signup and view all the answers

    As a common stockholder, your returns are earned before all other security-holder claims have been satisfied in full.

    <p>False</p> Signup and view all the answers

    If you purchase 100 shares of Disney's common stock, you own an interest in the firm's studios, movies, and theme parks.

    <p>True</p> Signup and view all the answers

    Voting rights as an owner of Disney's stock do not entitle you to vote for the members of the firm's board of directors.

    <p>False</p> Signup and view all the answers

    Limited voting rights mean that your 100 shares of Disney's stock represent a significant portion of the company's total shares.

    <p>False</p> Signup and view all the answers

    Common stock provides guaranteed returns before any other security-holder claims are satisfied.

    <p>False</p> Signup and view all the answers

    Preferred stockholders have less priority over common shareholders in receiving dividends.

    <p>False</p> Signup and view all the answers

    Firms that sell bonds are required to pay dividends to their shareholders.

    <p>False</p> Signup and view all the answers

    The price of Qualcomm's stock increased by 50% in 2000.

    <p>False</p> Signup and view all the answers

    If a company chooses to retain all its earnings, it must pay dividends to its shareholders.

    <p>False</p> Signup and view all the answers

    Investors typically value firms with higher profits by placing a lower value on their stock.

    <p>False</p> Signup and view all the answers

    Preferred stock is considered a form of equity security.

    <p>True</p> Signup and view all the answers

    Preferred shareholders must receive their dividends before common stockholders receive theirs.

    <p>True</p> Signup and view all the answers

    If a company cannot pay its interest expenses, common stockholders will still receive dividends.

    <p>False</p> Signup and view all the answers

    Preferred dividends generally accrue and must be paid in full before common stockholders can receive any dividends.

    <p>True</p> Signup and view all the answers

    Cumulative preferred stock does not have a feature that allows the dividends to accrue if not paid.

    <p>False</p> Signup and view all the answers

    In the event of bankruptcy, common stockholders are paid before preferred stockholders from the firm's assets.

    <p>False</p> Signup and view all the answers

    All firms issue preferred stock with cumulative features.

    <p>False</p> Signup and view all the answers

    Common stockholders' returns are earned before all other security-holder claims have been satisfied in full.

    <p>False</p> Signup and view all the answers

    As an owner of Disney's stock, you have voting rights that entitle you to vote for the members of the firm's board of directors.

    <p>True</p> Signup and view all the answers

    If a company cannot pay its interest expenses, common stockholders will still receive dividends.

    <p>False</p> Signup and view all the answers

    Market-making is a function typically performed by commercial banks rather than investment banks.

    <p>False</p> Signup and view all the answers

    Preferred shareholders must receive their dividends before common stockholders receive theirs.

    <p>True</p> Signup and view all the answers

    Common stock provides a promised set of interest payments and a schedule for the repayment of principal.

    <p>False</p> Signup and view all the answers

    Equity securities are always sold in the short-term debt market.

    <p>False</p> Signup and view all the answers

    When a bond matures, the issuer repays the par value to the bond owner.

    <p>True</p> Signup and view all the answers

    Bonds with fixed interest rates may have fluctuating interest payments over their lifetime.

    <p>False</p> Signup and view all the answers

    Equity securities do not provide ownership stakes in the corporation.

    <p>False</p> Signup and view all the answers

    Preferred stockholders always have higher priority in receiving dividends compared to common stockholders.

    <p>False</p> Signup and view all the answers

    Voting rights are not associated with common stock ownership in corporations.

    <p>False</p> Signup and view all the answers

    Securities Markets provide money directly to firms in need whereas Commercial Banks loan money to those firms.

    <p>True</p> Signup and view all the answers

    Debt securities are an example of equity securities.

    <p>False</p> Signup and view all the answers

    The sale of securities in the primary market is the only time a firm receives money in return for its securities.

    <p>True</p> Signup and view all the answers

    Common stockholders have more priority over preferred stockholders in receiving dividends.

    <p>False</p> Signup and view all the answers

    Interest payments for bonds with fixed interest rates can change over the bond's lifetime.

    <p>False</p> Signup and view all the answers

    Seasoned offerings involve offering securities to the public for the first time.

    <p>False</p> Signup and view all the answers

    Preferred stockholders have less priority over common shareholders in receiving dividends.

    <p>False</p> Signup and view all the answers

    Common stock provides guaranteed returns before any other security-holder claims are satisfied.

    <p>False</p> Signup and view all the answers

    Proprietary trading is one of the key functions performed by investment banks.

    <p>True</p> Signup and view all the answers

    Securities sold to the public for the first time are considered part of a seasoned offering.

    <p>False</p> Signup and view all the answers

    If you purchase 100 shares of Disney's common stock, you own an interest in the firm's studios, movies, and theme parks.

    <p>True</p> Signup and view all the answers

    A bond with a face value of PHP1,000 and an 8 percent coupon rate will pay PHP80 per year in interest.

    <p>False</p> Signup and view all the answers

    Common shareholders will be paid dividends before preferred shareholders if the company cannot pay its interest expenses.

    <p>False</p> Signup and view all the answers

    Preferred stock with a cumulative feature must be paid in full before common shareholders can receive any dividends.

    <p>True</p> Signup and view all the answers

    All firms issue preferred stock with cumulative features.

    <p>False</p> Signup and view all the answers

    Preferred stockholders have a less preferred claim on the distribution of assets compared to common stockholders in the event of bankruptcy.

    <p>False</p> Signup and view all the answers

    If a firm goes bankrupt and sells its assets, bondholders will be paid after preferred stockholders.

    <p>False</p> Signup and view all the answers

    Preferred stock is considered a form of debt security.

    <p>False</p> Signup and view all the answers

    Which market are securities with a maturity of between 1 and 10 years typically sold in?

    <p>Capital market</p> Signup and view all the answers

    What does it mean when a bond has a fixed interest rate?

    <p>The interest payments remain the same over the bond's lifetime</p> Signup and view all the answers

    What is the typical payment period for the interest on a bond with a coupon rate of 8 percent and two payments per year?

    <p>Every six months</p> Signup and view all the answers

    What type of securities represent ownership of a corporation?

    <p>Equity securities</p> Signup and view all the answers

    What is the main difference between raising money in the securities markets and raising money through commercial banks?

    <p>Securities markets involve investors providing money directly to firms, while commercial banks involve firms making deposits and then borrowing money.</p> Signup and view all the answers

    What happens during a primary market sale of securities?

    <p>Firms receive money from the sale of securities to the public for the first time.</p> Signup and view all the answers

    Which category do debt securities fall under?

    <p>Fixed-income securities</p> Signup and view all the answers

    What types of investments can firms make with the funds raised in the securities markets according to the text?

    <p>Investments in research and development</p> Signup and view all the answers

    What is the primary function of investment banks related to securities markets?

    <p>Acting as intermediaries between investors and firms seeking capital</p> Signup and view all the answers

    Why is the sale of securities in the primary market significant for firms?

    <p>Firms receive money in return for their securities for the first time.</p> Signup and view all the answers

    What is the main distinction between preferred stockholders and common stockholders in terms of dividend payments?

    <p>Preferred shareholders receive their dividends before common stockholders receive theirs.</p> Signup and view all the answers

    How are dividends treated for cumulative preferred stock?

    <p>Dividends accrue for preferred stockholders and must be paid in full before common shareholders.</p> Signup and view all the answers

    What happens to promised dividends for preferred stockholders if the company cannot pay its interest expenses?

    <p>Dividends owed to the preferred stockholders generally accrue and must be paid in full.</p> Signup and view all the answers

    What is the main difference between firms that sell bonds and firms that sell stock, according to the text?

    <p>Stock does not require firms to pay dividends, while bonds do.</p> Signup and view all the answers

    What is the term used to define the feature where preferred stock dividends accrue and must be paid in full before common shareholders receive any dividends?

    <p>Cumulative feature</p> Signup and view all the answers

    How did Qualcomm's stock price change after its profits and dividends deteriorated?

    <p>It dropped by 50 percent, then by another 26 percent, and then by another 30 percent.</p> Signup and view all the answers

    In the event of bankruptcy, what is the order of priority for claiming assets among bondholders, preferred stockholders, and common stockholders?

    <p>Bondholders, preferred stockholders, common stockholders</p> Signup and view all the answers

    What factor often leads investors to place a higher value on a firm's stock?

    <p>The firm's ability to earn higher profits</p> Signup and view all the answers

    'Cumulative preferred stock' is named as such because:

    <p>The dividends accumulate and must be paid before common shareholders' dividends.</p> Signup and view all the answers

    What does preferred stockholders taking a 'preferred' position imply?

    <p>Preferred stockholders receive dividends before common shareholders.</p> Signup and view all the answers

    Why might a company choose to retain all its earnings within the firm and pay no dividends?

    <p>To use the money for new projects or investments</p> Signup and view all the answers

    What impact did Qualcomm's falling stock price have after its profits and dividends deteriorated?

    <p>It fluctuated dramatically.</p> Signup and view all the answers

    What distinguishes a common stock from a bond in terms of providing returns?

    <p>Common stock provides returns that are less certain.</p> Signup and view all the answers

    How do common stockholders' returns differ from other security-holder claims?

    <p>Common stockholders' returns are earned after other security-holder claims are satisfied.</p> Signup and view all the answers

    What ownership rights does an owner of Disney's common stock have?

    <p>Entitlement to company success in the form of dividends</p> Signup and view all the answers

    When you purchase common stock, what aspect of the company do you own?

    <p>Equity ownership in the corporation</p> Signup and view all the answers

    What is the significance of purchasing more shares of Disney's common stock?

    <p>Larger portion ownership of Disney</p> Signup and view all the answers

    In what situation do common stockholders receive their returns?

    <p>After all other security-holder claims are satisfied</p> Signup and view all the answers

    Which market does a firm receive money from directly when selling securities to investors?

    <p>Primary market</p> Signup and view all the answers

    What type of securities are sold in the primary market for the first time to the public?

    <p>Equity securities</p> Signup and view all the answers

    What category do debt and equity securities fall under?

    <p>Basic securities</p> Signup and view all the answers

    Where do firms typically borrow money by selling debt securities?

    <p>Primary market</p> Signup and view all the answers

    What happens to the cash flow earned from a firm's investments?

    <p>It is reinvested in the firm</p> Signup and view all the answers

    What does a firm do with the funds it raises in the securities markets?

    <p>Reinvest in the firm's business</p> Signup and view all the answers

    What is the main difference between a note and a bond?

    <p>Note has a maturity of between 1 and 10 years, while bonds have a maturity of over 10 years.</p> Signup and view all the answers

    What does it mean when a bond has a 'fixed interest rate'?

    <p>The interest payment for the bond remains the same throughout its lifetime.</p> Signup and view all the answers

    What is the typical payment period for the interest on a bond with a coupon rate of 8 percent and two payments per year?

    <p>Every six months</p> Signup and view all the answers

    What do equity securities represent?

    <p>Partial ownership of the corporation</p> Signup and view all the answers

    Why are bonds generally described using 'fairly exotic terminology'?

    <p>To highlight their complexity and unique features</p> Signup and view all the answers

    What type of securities are sold in the capital market?

    <p>Long-term debt securities</p> Signup and view all the answers

    What distinguishes common stock from a bond?

    <p>Common stock provides less certain returns compared to a bond.</p> Signup and view all the answers

    Which statement is true about common stock?

    <p>Common stockholders have limited voting rights.</p> Signup and view all the answers

    If you purchase 100 shares of common stock, what do you become in relation to the company?

    <p>An owner</p> Signup and view all the answers

    What do voting rights as an owner of common stock entitle you to do?

    <p>Vote for board members</p> Signup and view all the answers

    How do the returns of common stockholders differ from other security-holder claims?

    <p>Common stockholder returns are earned after all other security-holder claims are satisfied.</p> Signup and view all the answers

    What are common stockholders considered in relation to the firm's ownership?

    <p>Residual owners</p> Signup and view all the answers

    What is the main difference between receiving dividends for bondholders and stockholders?

    <p>Bondholders only receive dividends if the company makes a profit, while stockholders receive dividends regardless.</p> Signup and view all the answers

    Why do firms that sell stock sometimes choose not to pay dividends?

    <p>To reinvest earnings back into the company for growth.</p> Signup and view all the answers

    What is the significance of a firm's stock price increase in relation to its profits and dividends?

    <p>Higher profits and dividends usually lead to a higher stock price.</p> Signup and view all the answers

    Why did Qualcomm's stock price decline significantly after 1999?

    <p>Because investors placed lower value on the firm's stock.</p> Signup and view all the answers

    How did Qualcomm's stock price perform after its profits and dividends deteriorated?

    <p>It fell significantly in 2000, 2001, and 2002.</p> Signup and view all the answers

    What impact does a company's decision to retain all earnings have on its ability to pay dividends?

    <p>It prevents the company from paying any dividends.</p> Signup and view all the answers

    What is the main advantage of preferred stock with a cumulative feature over common stock?

    <p>Being paid in full before common shareholders in case of bankruptcy</p> Signup and view all the answers

    What happens if a company cannot earn enough to cover its interest expenses?

    <p>Neither preferred nor common stockholders receive dividends</p> Signup and view all the answers

    Why is preferred stock with a cumulative feature often referred to as 'cumulative preferred stock'?

    <p>Because it must have its dividends paid in full before common shareholders</p> Signup and view all the answers

    In the event of a firm going bankrupt and liquidating its assets, what is the payment hierarchy?

    <p>Preferred stockholders, bondholders, common stockholders</p> Signup and view all the answers

    What feature of preferred stock ensures that preferred shareholders receive their dividends before any distribution to common stockholders?

    <p>Cumulative accrual of dividends</p> Signup and view all the answers

    Why might a company choose to issue preferred stock with a cumulative feature?

    <p>To ensure that preferential shareholders are paid their dividends first</p> Signup and view all the answers

    Study Notes

    • Investment banks play a crucial role in creating capital for companies, governments, and other entities by bringing new securities to the market.
    • Functions of investment banks include underwriting, market-making, client-related trading, proprietary trading, and mergers and acquisitions.
    • The process of bringing new securities to the market involves creating legal documents like prospectuses for offerings such as Initial Public Offerings (IPOs) and Private Placements.
    • Investment banks conduct road shows where company management and investment bankers meet potential investors and analysts to promote new securities.
    • Underwriting in investment banking involves syndicates, buying and selling securities, and earning a gross spread.
    • Underwriting can be done through firm commitment (underwriter buys all securities at a specified price) or best efforts bid (underwriter only attempts to sell the securities).
    • Settlement risk in underwriting occurs when the other party in the transaction fails to deliver.
    • Securities markets provide a direct way for investors to provide money to firms in need by purchasing debt or equity securities.
    • Firms sell securities in the primary market to raise funds, then invest the raised capital back into their business operations.
    • Debt securities are sold in the debt market, with short-term debt in the money market and long-term debt like notes and bonds in the capital market.
    • Equity securities represent ownership in a company.

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