Lectures 17 & 18

The 20-year average return of venture capital firms has been about

20%

By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver _____ face value securities for _____.

$100,000; $115,000

By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver face value securities for

$100,000; $96,000

By buying a long $100,000 futures contract for 115, you agree to pay ____ for ____ face value securities.

$115,000; $100,000

Tasks that investment bankers perform when acting as underwriters to sell securities to the public include:

(1) Pricing the security and (2) preparing the filings required by the SEC

Futures markets have grown rapidly because futures contracts

(1) are standardized (2) have lower default risk (3) are liquid

Private placements

(1) do not require the services of investment bankers (2) need not be registered with the SEC

All other things held constant, premiums on put options will increase when the

(1) exercise price increases (2) term to maturity increases

Financial derivatives include

(1) futures (2) forward contracts (3) options

Which of the following is a likely reason for a portfolio manager to sell a stock index future short?

(1) he wants to lock in current prices (2) He wants to reduce stock market risk

Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included

(1) helping firms that want to acquire another firm locate a firm to pursue. (2) helping would-be acquirers solicit shareholders through a tender offer. (3) helping target firms ward off undesired takeover attempts.

The buyers of private placement issues are most likely to be

(1) insurance companies (2) pension funds

Which of the following statements about private placements are true?

(1) private placements are more common for the sale of bonds than for stocks (2) Investment bankers, though not required for private placement, often facilitate the transaction

The registrations statement the securities underwriter files with the SEC contains information about

(1) the firm's financial condition, management, competition, industry, and experience (2) how the funds will be used

The disadvantage of swaps is that

(1) they lack liquidity (2) it is difficult to arrange for a counterparty (3) they suffer from default risk

The agency which regulates futures options is the

Commodities Futures Trading Commission

Which of the following statements about venture capital funding is not correct?

Firms hope to exit a start-up firm in 3-5 years

The most active investment banking firm in the private placement market is

Goldman Sachs

The largest US underwriter of global debt and equity issues, as of 2009, was

J.P. Morgan

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n)

currency swap

Most investment banks are attached to

large brokerage houses

Venture capital firms are usually organized as

limited parnterships

If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ____.

loe $12,500

A contract that requires the investor to buy securities on a future date is called a

long contract

A swap that involves the exchange of one set of interest payments for another set of interest payments is called a(n)

interest rate swap

As compared to a default on the notional principle, a default on a swap

is less costly

The _____ of the volume handled by brokers and dealers is in the publicly held securities

vast majority

A _____ is a specialized firm that finances young, start-up companies

venture capital firm

Which of the following provides funds to companies not yet ready to sell securities to the public?

venture capital firms

All other things held constant, premiums on both put and call options will increase when the

volatility of the underlying asset increases

The primary functions of investment banks are

helping corporations raise funds and help corporations issue new securities

An investment bank is a financial institution that

helps corporations raise funds

There are _____ risk and _____ returns to investors in private equity buyouts

high; high

An option that can be exercised at any time up to maturity is called a(n)

American Option

In ____ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis.

Best efforts

An option that can be exercised only at maturity is called a(n)

European Option

If you sell a short contract on financial futures, you hope interest rates will _____

Rise

Which of the following is not a financial derivative?

Stocks

Often investment bankers will form a group, each one buying only a portion of the new securities to be issued. Such a group is called an underwriting _____.

Syndicate

Which of the following is an advantage to a private equity buyout?

The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies

Which is not a problem of forward contracts?

a lack of flexibility

With private investing

a limited partnership is formed that raises money from a small number of high-wealth investors

One advantage of using swaps to eliminate interest-rate risk is that swaps

are less costly than rearranging balance sheets

The advantage of forward contracts over future contracts is that forward contracts

are more flexible

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could _____ options on financial futures.

buy put

A long contract requires that the investor

buy securities in the future

If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by

buying foreign exchange futures long

An option that gives the owner the right o buy a financial instrument at the exercise price within a specified period of time is a(n)

call option

The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is

controlled while preserving the possibility of gains

an increase in the volatility of the underlying asset, all other things held constant, will ____ the option

increase

Since the stock market decline in 2000, the number of companies funded and the total funds invested by venture capital firms have

declined

An increase in the exercise price, all other things held constant, will _____ the premium on call options

decrease

Which of the following is a characteristic feature of venture capital firms?

developing a portfolio of companies

All other things held constant, premiums on call options will increase when the

exercise price falls

If you buy a long contract on financial futures, you hope interest rates will

fall

If you sell a short futures contract, you hope that bond prices will

fall

Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division?

forming a syndicate of purchasers

From an investment banker's perspective, the best outcome occurs when a new issue is

fully subscribed

Which of the following is not a characteristic feature of venture capital firms?

funding just one or a small number of firms

Investment banks may lose _____ if new securities issues are _____.

future business; oversubscribed

IF you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will _____.

gain $12,500

Investment banks sell _____ securities to the public, and brokerage firms sell _____ securities to the public.

new; existing

SEC registration is

not required for securities that are sold through a private placement

A put option gives the seller the ____ to ____ the underlying security

obligation; buy

A call option gives the seller the _____ to ____ the underlying security

obligation; sell

Options are contracts that give the purchasers the

opportunity to buy or sell an underlying asset

If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to

pay a fixed rate while receiving a floating rate

By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a _____

prospectus

An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a(n)

put option

If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap which requires Second National to

receive a fixed rate while paying a floating rate

The main disadvantage of futures contracts as compared to options on futures contracts is that futures

remove the possibility of gains

a call option gives the owner the _____ to _____ the underlying security.

right; buy

A put option gives the owner the _____ to _____ the underlying security.

right; sell

Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called ______

seasoned issues

If a firm is due to be paid in euros in 2 months, to hedge against exchange rate risk the firm should

sell foreign exchange futures short

a short contract requires that the investor

sell securities in the future

If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future, then he should

sell stock index futures short

Under the best efforts underwriting, the underwriter

sells the security on a commission basis

The sources of venture capital funding have

shifted from wealthy individuals to pension funds and corporations

A contract that requires the investor to sell securities on a future date is called a

short contract

A typical venture capital firm has a _____ number of investors who each contribute a _____ amount of money to the fund

small; large

Futures differ from forwards because they are

standardized contracts

Options on individual stocks are referred to as _____.

stock options

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the

strike price

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a

swap

If you buy an option to buy Treasury futures at 110, and at expiration the market price is 115,

the call will be exercised

If you buy an option to buy Treasure futures at 115, and at expiration the market price is 110,

the call will not be exercised

When taking a particular course of action for a private equity firm, the CEO of a privately held company needs to convince ________ that it is a good decision.

the managing partners

If you buy an option to sell Treasury futures at 115, and at expiration the market price is 110,

the put will be exercised

If you buy an option to sell Treasury futures at 110, and at expiration the market price is 115,

the put will not be exercised

The main reason to buy an option on a futures contract rather than the futures contract itself is

to preserve the possibility of gains

Investment banks advertise upcoming securities offerings with block ads in the WSJ. Such an ad is called a _____.

tombstone

Which is not an activity of investment banks?

underwriting new issues of federal government bonds