5600 Final - Questions Only

What are the most common uses of Rule 144A in large securities offerings?

Issuance of bonds and convertible bonds

What is a key consideration in determining the cost and other parameters of acorporate debt offering and why is it important?

Key Consideration = Creditworthiness of the issuer Importance: • Determines the interest rate and terms of the debt offering • Credit rating agencies assign credit ratings to issuers based on their creditworthiness • Creditworthiness is based on factors such as financial strength, cash flow, and business outlook • Accurately assessing creditworthiness is crucial in ensuring favorable borrowing terms.

Why have strategic buyers traditionally been able to out bid financial buyers inauctions?

Strategic buyers traditionally outbid financial buyers in auctions because of their willingness to pay a higher price than the current market price for a public company due to the potential for both expected synergies (cost-cutting and revenue generating) and a control premium.

What risks do investors take on when buying on margin?

When investors borrow money, or buy on margin, they're going for these types of gains. But the strategy is extremely risky. Buying on margin involves getting a loan from your brokerage and using the money from the loan to invest in more securities than you can buy with your available cash.

After an initial hedge is in place, what do hedge fund investors in convertible bondsdo with shares of the underlying stock when the stock price increases or decreases?

When stock price increases, hedge fund (=HF) investors in convertible bonds short more shares of the underlying security (increase their hedge ratio). When stock price decreases, HFs buy shares to reduce current short position (decrease their hedge ratio)

When might an investment bank decline participation in an underwriting and why?

When the perceived risks of participation outweigh the expected underwriting fees. One possible risk is if the trader believes demand for new securities from the issuer is lower than the contemplated issuance size. Alternatively, the investment bank could have several potential underwriting commitments at once, and needs to ration the regulatory capital that must be set aside. Finally, the firm could decline because of reputational concerns or problems found during due diligence.

How were senior tranches of a CDO able to obtain investment grade credit ratingswhen some of the underlying assets were non-investment grade?

the pool is highly diversified of many assets.

Provide 5-7 reasons that an investment bank might give to support their advice thata private company should "go public".

• Access to capital: Going public can provide a company with access to a large pool of capital through public equity markets. • Liquidity: Public markets offer liquidity for shareholders by providing an avenue to buy and sell shares. • Public visibility: A company can gain public visibility and attract investors through the IPO process. • Employee incentives: Publicly traded companies can offer stock options and other equity-based incentives to attract and retain employees. • Acquisition currency: Publicly traded companies have a currency for acquisitions and can use their stock as a form of payment. • Valuation: Going public can provide a valuation premium over remaining a private company. • Enhance reputation: Going public can enhance a company's reputation, providing credibility in the market and the ability to raise funds at a lower cost.

Allocation of initial public offering (IPO) shares

• Conflicts of interest arise when investment banks allocate shares of a new IPO to their preferred clients or friends and family, rather than to the general public. • Regulation: The Securities and Exchange Commission (SEC) implemented Rule 5130, which restricts the ability of broker-dealers to participate in an IPO if they have a conflict of interest.

Insider Trading

• Conflicts of interest can arise when insiders, such as company executives or investment bankers, use non-public information to profit from their investments in a company's securities. • Regulation: The SEC enforces laws prohibiting insider trading, including the Securities Exchange Act of 1934 and the Dodd-Frank Act of 2010. The SEC also requires public companies to disclose insider trading activity by their officers and directors.

Compensation Arrangements

• Conflicts of interest can arise when investment bank employees receive compensation based on the volume or profitability of their transactions, leading to excessive risk-taking and unethical behavior. • Regulation: The Dodd-Frank Act of 2010 includes provisions aimed at regulating compensation practices in the financial industry to reduce conflicts of interest and encourage responsible behavior.

Investment banking conflicts of interest

• Conflicts of interest can arise when investment banks engage in both underwriting and trading activities for the same client, leading to potential conflicts between the bank's interests and those of the client. • Regulation: The Glass-Steagall Act of 1933 required the separation of commercial banking and investment banking activities, but this law was largely repealed in 1999. The Dodd-Frank Act of 2010 includes provisions aimed at reducing conflicts of interest between investment banks and their clients.

Analyst conflicts of interest

• Conflicts of interest can arise when investment banks publish research reports on companies that they also have a financial interest in, leading to biased or misleading analysis. • Regulation: The SEC implemented Regulation AC, which requires analysts to disclose any conflicts of interest and to provide a fair and balanced analysis of companies.

How many shares will be issued by a convertible issuer if conversion occurs for a$200 million convertible with a conversion premium of 20%, which is originallyissued when the issuer's stock price is $25? (show your calculation).

Price: $25 * 1.2 = $30 $200 million / $30 = 6.67 million shares

Describe what Prime Brokerage is, including the generic name of the financialinstitutions that are primarily targeted for this business.

Prime Brokerage is a Trading Division business area that focuses on hedge funds and provides the following products: lending and clearing securities; margin loans; securities trading; securities processing and clearing; global securities custody and trust services; cash management and asset administration.

What type of securities offerings do not need to be registered with the SEC?

Private Placements - these securities are not offered or sold in a public offering

What are the major criticisms directed at Moody's, Standard & Poor's and Fitch?

Ratings agencies have been criticized for their role in rating mortgage backed securities higher than they should have leading up to the credit crisis. They are also criticized for not downgrading them quickly enough. Other criticisms stem from their relationships to issuers of bonds and other non-asset-backed securities. Since the issuers pay to have the securities rated it has been suggested that the agencies are influenced by the corporations into giving their securities a higher rating.

What did Glass-Steagal require from approximately 1933 to 1999?

Separation of deposit-taking commercial banks from securities related businesses such as underwriting and trading

Provide definitions for strategic buyers and financial buyers in a prospective M&Atransaction.

Strategic Buyers in an M&A deal aim to purchase another company in the hopes of generating synergies in the context of reduced costs or increased revenues. Financial buyers are those firms whose business model is to buy, to develop, and subsequently to sell businesses. Financial buyers acquire operating companies for their fund's portfolio by making direct equity investments into these companies in exchange for a percentage ownership. By doing this, the financial buyers expect to profit from both the cash flow that the operating company generates and the capital gains realized upon exit

For many types of projects, investment banks charge clients per hour spent, similar to consultants or lawyers, as they produce analysis requested by clients. True or false?

False

Which of the following products does a bank's Debt Capital Markets team work on? a) Common stock b) Mergers and Acquisitions (M&A) c) Investment grade bonds d) Convertible bonds

c) Investment grade bonds

A goal of many parts of U.S. regulatory legislation has been to minimize conflicts ofinterest between issuers, investment banks, and investors. Provide examples ofconflicts of interest in the U.S. investment banking industry and the correspondingregulations that attempted to resolve those issues.

• Allocation of initial public offering (IPO) Shares • Analyst conflicts of interest • Investment banking conflicts of interest • Insider trading • Compensation arrangements

When a company has agreed to a green shoe, who does the underwriter buy sharesfrom if the share price drops? Who do they buy shares from if the share priceincreases?

• If the share price drops, then the investment bank will buy shares in the market at the prevailing market price in order to generate demand and support the stock. If the share price increases, then the bank will buy shares from the issuer at the offering price. • If the IPO is a success and stock prices surge, the underwriters buy the extra stock from the company at the predetermined price, and send those extra shares, at a profit, to whoever bought them.

List the three types of bank participants in an underwriting syndicate and their coreresponsibilities, in order of compensation received, from high to low.

• Lead bookrunners - they have the responsibility for determining the marketing method and the pricing for the transaction and, therefore, receive the highest underwriting allocation and a proportionately higher percentage of the gross spread • Co-managers - they take on smaller underwriting allocations and provide minor input to the bookrunners on marketing a pricing issues, and have less risk and less work to, and so receive lower compensation • Selling Group - these banks don't take any financial risk and receive even lower compensation

What does the Dodd-Frank Act of 2010 mainly focus on?

• Mainly focused on protecting consumers • Ending TBTF bailouts • Improving coordination between various regulatory agencies- Identifying systemic risk early • Creating greater transparency to complex financial instruments • Proving greater transparency for executive compensation

Following the 1929 Stock market crash, Congress passed a series of Acts to regulatethe securities industries. Name four of these Acts and briefly describe their purpose.

• Securities Act of 1933 • Glass-Steagall Act of 1933 • Securities Exchange Act of 1934 • Investment Company Act of 1940

Before an SEC registration statement is declared effective, companies (or their underwriters) that sell stock or are deemed to be promoting the sale of stock are likely deemed to have a securities law violation. What is this violation called and what are its consequences?

"Gun Jumping" • May result in an SEC imposed "cooling off" period, rescission rights to purchasers in the public offering, and class action or other litigations

What are league tables and why are league tables sometimes important ininvestment banking?

"League tables" is the way that investment banking industry keeps track of underwriting participations by all banks and this becomes a basis for comparing banks' underwriting capabilities - there is one for every different type of security and geographic region.

Investment banks invest more money in the markets than institutional investors. True or false?

False

Investment banks never lose money on any type of underwriting transaction. True or false?

False

What is a secondary offering of common stock?

An organized underwritten sale of existing shares owned by a large shareholder

People working in Equity Capital Markets or Debt Capital Markets are generally not allowed to have material non-public information about public companies. True or false?

False

A few days after a typical IPO has been priced, how do the shares and cash settle between the issuer (company) and the investors who bought the IPO?

A lead underwriter wires the funds to the company, receives the shares from the company electronically, and then settles separately with investors later the same day

What is a potentially feasible timeframe taken to complete an IPO, measured from when a company hires investment bankers and lawyers and instructs them to begin their work, to the pricing and settlement of the IPO?

4-6 months

When is a break-up fee paid? What is a typical fee range as a percent of acquisitionequity value?

A "go-shop provision" would allow a target company to "shop" its current deal with other prospective buyers, whereas a "no-shop" provision will disallow this. A board will opt for a go-shop provision because it will encourage other potential buyers, who may be competitors of the acquiring company, to be willing to pay more for the target company after seeing the viability of the company and the deal.

Why might a board want to include a "go-shop" provision in the merger/purchaseagreement?

A "go-shop provision" would allow a target company to "shop" its current deal with other prospective buyers, whereas a "no-shop" provision will disallow this. A board will opt for a go-shop provision because it will encourage other potential buyers, who may be competitors of the acquiring company, to be willing to pay more for the target company after seeing the viability of the company and the deal.

Explain what a "green shoe" is.

A Green Shoe is an over allotment option that gives an investment bank the right to sell short a number of securities equal to 15% of an offering the bank is underwriting for a corporate client. The SEC permits this activity to enable investment banks to stabilize the price of an equity offering following its initial placement, in order to mitigate downside share price movement in the secondary market. This benefits the shareholders, the company, and the investment bank underwriters.

Eurobonds

A bond placed in countries other than the one in whose currency the bond is denominated.

Securities Exchange Act of 1934

A federal law dealing with securities regulation that established the Securities and Exchange Commission to regulate and oversee the securities industry.

Why might a younger high-tech company need to select equity over debt whenraising capital?

A high-tech company, that has a less certain future cash flow, will prefer an equity offering since there are no regular payments required in raising equity capital; it may not be able to generate the necessary cash to make regular coupon payments on debt capital. A young company that does not have the same credit reputation as older will have to pay more for debt financing - interest rates are higher and so raising debt capital will be more expensive.

What does it mean to be a "market maker", and how do investment banks performthis service to clients?

A market maker is a firm or individual that is willing to buy and sell securities in a specific market, acting as a principal to facilitate trading. Investment banks perform this service to clients by providing liquidity and price discovery for securities. Investment banks can buy and hold a certain amount of a security, allowing them to buy and sell the security at will, thus maintaining a liquid market. By doing so, they provide market depth and reduce bid-ask spreads for the securities, making it easier for investors to buy and sell. In return for their services, investment banks earn a spread or commission on each transaction they facilitate.

How does a negotiated (best efforts) transaction differ from a "bought deal"?

A negotiated/best efforts transaction means the issuer will bear the price risk; whereas in the underwriting in a bought deal, the investment bank bears the price risk.

Why might an investment bank place higher priority on sell-side M&A engagementsover buy-side engagements?

A sell-side assignment takes priority of a buy-side engagement because it has a higher probability of completion as compared to a buy-side engagement.

What is a shelf registration statement and what securities can be included in it?

A shelf registration statement is a single filing that covers multiple securities offerings, allowing a company to have multiple offerings over a three-year period, as long as the registration is updated with quarterly financial statements. The securities that can be included in a shelf registration statement include equity offerings, debt, and convertible securities.

Why would a wealth manager at an investment bank choose to allocate some of aclient's asset to funds run by other banks' asset management divisions?

A wealth manager would choose to allocate some of a client's asset to another bank in the event of (i) their own bank not having the a specific investment product, (ii) performance of an internal fund is less than a competing firm at another firm

Assume Hedge Fund A purchases a portion of Company B's convertible and willexecute a delta hedge strategy. Describe the steps Hedge Fund A will take in theevent the price of Company B's shares fall, and explain the reasoning.

A. Example of a convertible bond with a conversion feature into 100 common shares at $10/share B. Hedge fund establishes a short position of 65 shares of the issuer's stock to hedge the equity exposure of the convertible C. Hedge fund may adjust the short position based on changes in the hedge ratio during the life of the convertible D. A decrease in the issuer's share price may result in a change in the hedge ratio, requiring adjustments to the short position E. To adjust the hedge ratio, the hedge fund may need to buy or sell shares in the open market F. "Covering" a short position of five shares leaves the hedge fund with a new short position of 60 shares

True or false (and explain your answer): Convertible arbitrage hedge funds invest inconvertible bonds because the fund managers have a bullish view on the company'sstock.

A. False. Convertible securities are usually sold at a discount to their theoretical value, which is typically 102%-107%, so delta hedging should allow HFs to make trading profits at least equal to the difference between the theoretical value and the discounted price.

Rule 144A

An exemption to the holding period and volume restrictions of Rule 144 for qualified institutional buyers (QIBs)

Why would a prospective issuer prefer to hire as underwriter an investment bankthat has traders already active in its security?

By already being active in a security, the bank may have a better understanding of who the potential investors are and may have already developed a relationship with those investors. As a result, the bank may be able to better gauge overall market sentiment and demand for the new issuance.

Disclosure of information to investors is another recurring theme in U.S. regulation of the securities industry. Provide examples of disclosure required by U.S.regulations.

Companies must give investors a prospectus: • Description of company's properties and business • Description of the security to be offered for sale • Information about the management of the company • Financial statements certified by independent accountants && • The Registration Statement: before a security can be sold, certain info regarding the issuer and the security must be provided to regulators and prospective investors through a filing with the SEC && • The Investor Prospectuses: companies are required to provide investors with a prospectus. Securities cannot be distributed until after the issue had been resisted with the SEC

Of the major valuation methods which one(s) are based on relative values? ...on intrinsic values? ...on ability to pay?

Comparable company analysis and comparable transactions analysis are multiples-based methods for determining value in relation to a peer group of public companies and so are methods based on relative values. A DCF is a cash flow-based method of valuation which attempts to determine the intrinsic value of a company based on future cash flow projections. An LBO analysis attempts to determine an internal rate of return based on future cash flow projections and so is a valuation method based on the company's ability to pay.

Investment Company Act of 1940

Congressional legislation regulating companies that invest and reinvest in securities. The act requires an investment company engaged in interstate commerce to register with the SEC.

In most IPOs, at the time they are hired by the issuing company, investment banks commit to buy the shares at the valuation they predicted the market would accept, in the event that investors do not turn out to buy the shares. True or false?

False

The top 9-12 global investment banks usually have higher return on equity (ROE) from underwriting stocks and bonds than from their sales & trading businesses. True or false?

False

The top 9-12 global investment banks usually make more revenue from underwriting stocks and bonds than from their sales & trading businesses. True or false?

False

FICC is one of the main Divisions in an Investment Bank. What does FICC stand for?Other than during 2007 and 2008, how does this division typically rank versus otherdivisions from a revenue point of view? And from a return on equity view?

Fixed Income, Currencies and Commodities. FICC is typically the most profitable Division. However, during 2007 and 2008, there were huge losses in this Division from significant investments and underwriting in subprime mortgage securities and, to a lesser extent, from bridge loans and off-balance sheet liabilities associated with SIVs.

Describe the function of the equity capital markets group, including the two majordivisions they directly work with and the two types of clients they indirectly workwith.

Function: Equity Capital Markets Groups help private companies determine if an IPO of stock is a logical decision based on an analysis of benefits and disadvantages. Then, determines if there is sufficient investor demand to purchase new equity securities offered by the company. Then, the investment bank determines the expected value of the company based on comparisons with publicly traded comparable companies or values derived through other methods. Major divisions (directly): Groups work directly with companies prepping for primary market transactionsMajor divisions (indirectly): They indirectly work with institutional clients as well as the issuing companies themselves.

Why might a high short interest ratio be potentially misleading with respect to theopinions of market participants regarding a particular stock?

High short interest ratio may be misleading as some of it may relate to hedge fund purchases of convertible securities, in which the shorting is not an expression of bearish view on the stock. Therefore, an accurate interpretation of short interest ratios should consider convertibles issued and publicly known derivative transactions.

In a comparable transactions analysis, what additional considerations might aninvestment banker factor in when valuing an emerging market company?

Investment banks can find revenue opportunities in emerging markets, but they also face significant risks such as political, currency, and liquidity risks. Citigroup, Goldman Sachs, UBS, J.P. Morgan, Morgan Stanley, Deutsche Bank, and Credit Suisse are among the investment banks that have successfully prioritized activities in these markets.

What are some methods used by investment banks to help equity issuers mitigateprice risk during the marketing process?

Investment banks may use different distribution alternatives to help issuers mitigate price risk. This may include completing an accelerated offering with a shorter roadshow period of one or two days (red herring prospectus delivered), or by carrying out a block trade, in which the investment bank buys the securities without a road show and bears full price risk (red herring prospectus not delivered).

Investment bank clients can be categorized into two broad groups of issuers and investors. These two groups often have competing objectives (issue equity at highest possible price vs. acquire stock in companies at lowest possible price). Who withinthe investment bank is responsible for balancing these competing interests?

If a company decides to complete an equity financing, ECM assumes primary responsibility for executing the transaction. This involves close coordination with sales and trading professionals in the Trading Division to determine the investment appetite of their clients. In essence, ECM intermediates between the Investment Banking Division's issuing clients, who want to sell securities at the highest possible price, and the Trading Division's investing clients, who want to buy securities at the lowest possible price. This poses a challenge that requires considerable dexterity to balance competing interests and structure an optimal equity-related security.

What is a potential risk of trying to complete a stock-based acquisition duringperiods of high market volatility?

In a stock-based acquisition, if a fixed exchange ratio, the number of acquiring company shares to be exchanged for each target company shares, is used, then high market volatility would greatly change the economic value of the acquiring stock.

Describe the three principal businesses of an investment bank.

Investment Banking Business • Arranges financing for corporations and governments: debt; equity; convertibles. • Advises on M&A transactions. Trading Business • Sells and trades securities and other financial assets as an intermediary on behalf of institutional investing clients. • Operates in two business units: Equity and Fixed Income, Currency, and Commodities (FICC) 1. • Provides research to investing clients. Asset Management Business • Offers equity, fixed income, alternative investments, and money market investment products and services principally to individual investing clients. • For alternative investment products, the firm co-invests with clients in hedge funds, private equity, and real estate funds.

In the U.S., if an M&A transaction is relatively large within its industry, what is thename of the regulatory filing that is probably necessary before the transaction canbe consummated? Which agency is it filed with? How long is the waiting periodafter a filing is made?

Most large M&A transactions require a Hart-Scott-Rodine (HSR) filing before the transaction can be consummated. It is usually filed with the Federal Trade Commission (FTC) and the Department of Justice (DOJ). The waiting period after a filing last for 30 days in which the FTC and DOJ may request further information. The European Commission is the European regulator that may require further filings in an M&A transaction.

Why might OTC derivatives be considered more risky than otherwise similarexchange-traded derivatives?

OTC derivatives are not in the public domain and remain confidential unless reported by the parties to the trade. The market for OTC derivatives is also much larger than the one for listed derivatives. Newly proposed regulations may require OTC contracts to be cleared through regulated exchanges. Companies with OTC are usually smaller, unable to meet exchange listing requirements, so more risky. Exchange traded derivatives are more regulated and guaranteed by the exchange, and there's also the Clearing House that acts as an intermediary between buyer and seller.

What are two key considerations for bankers in the debt capital markets divisionwhen working with an issuer on an offering?

Of critical importance is the determination of the likely impact that a new debt offering will have on the company's credit ratings. This can affect its future cost of capital. Additionally, Debt Capital Market Bankers gauge investor reaction to a potential offering, decide timing, maturity, size, covenants, call features, and other aspects of debt financing.

What are the objectives of Regulation FD? What are the concerns about this U.S.-based regulation?

Regulation FD requires companies to publicly disclose material information before discussing it with research analysts to level the playing field and provide transparency to all investors. However, concerns exist that this regulation may result in less timely and lower-quality information, causing a dilution in the quality of the information.

How do professionals in sales, trading and research work together?

Research provides investment ideas to sales, who contacts the bank's investing clients with specific trade ideas based on research's recommendations. Should the client decide to go ahead with the trade, sales works with traders to execute the trade.

Why are revenue synergies typically given less weight than cost synergies whenevaluating the combination benefits of a transaction?

Revenue synergies should be discounted from management's projections since they are very difficult to capture, though cost-synergies are generally easier to forecast since cost-structures typically do not regularly and drastically change.

What are the most common uses of Rule 144 (NOT Rule 144A)?

Sales of previously-restricted common stock in block trades or normal brokerage transactions

What is the significance of the Gramm-Leach-Bliley Act of 1999 in relation to thesecurities industry?

The Gramm-Leach-Bliley Act of 1999 repealed parts of the Glass-Steagall Act of 1933, allowing commercial banks, investment banks, and insurance companies to merge and engage in a wider range of financial activities. This led to the creation of financial conglomerates and increased competition in the financial industry. It also raised concerns about conflicts of interest, leading to increased regulation and oversight of the financial industry.

Which valuation method tends to show the lowest valuation range? Why?

The LBO analysis valuation method tends to show the lowest valuation range because it provides a "floor value" for a company since it represents the price that a financial buyer would be willing to pay, based on achievement of their required IRR. Strategic buyers will generally use the other valuation methods because they are able to pay more than the financial buyers since they can take advantages of synergies with their own company.

How have the U.S. enforcement actions against sell-side research in 2003heightened the issue of declining research revenues?

The NASD and the NYSE announced enforcement against 10 investment banks for a total of 1.4 billion to be paid in penalties and other fines. Banks also had to comply with new requirements that included the potential for the investment banking department to skew the research department, and making independent research available to consumers. These actions highlighted the fact that research was no longer becoming a profitable source of income to banks. The lack of clear revenue routes to research also play a role in the decreased role of research

A domestic airline based in the U.S. has placed a large $10 billion order for newairplanes with French aircraft manufacturer Airbus. Delivery is scheduled in fouryears. Payments are staggered based on a percentage of completion rate. The U.S.airline believes the Euro will appreciate against the Dollar during this time frame.How can the U.S. airline hedge currency risk related to this purchase with aninvestment bank?

The U.S. airline could use derivatives, specifically futures contracts, to hedge the exchange rate risk between the dollar and the Euro. The airline could purchase a foreign-exchange futures contract against the Euro/USD exchange rate. That way, if the value of the Euro increases, the losses due to exchange rates will be offset by gains from the increase in value of the futures contract.

Assume an acquiring company's P/E is 15x and the target company's P/E is 11x. Dueto these relative valuations, is the acquirer more or less likely to use stock as theacquisition currency? Why?

The acquirer is likely to use stock as the acquisition currency because the acquirer has to pay less for each dollar of earnings than the market values its own earnings. Hence, the acquirer will issue proportionally less shares in the transaction. Mechanically, proforma earnings, which equals the acquirer's earnings plus the target's earnings (the numerator in EPS) will increase more than the proforma share count (the denominator), causing EPS to increase.

Which of the following investment banks filed for bankruptcy in 2008? a) Morgan Stanley b) Bear Stearns c) Lehman Brothers d) Goldman Sachs

c) Lehman Brothers

What drove the need to separate research and investment banking?

The potential conflicts of interest drove the need to separate research and investment banking. There was the potential for the sell-side analysts to skew their research activities based on the Investment Banking Division's underwriting or M&A effort, rather than on the firm's investing clients' priorities for objective research

Glass-Steagall Act of 1933

This act forbade commercial banks from engaging in excessive speculation, added $1 billion in gold to economy and established the Federal Deposit Insurance Corporation (FDIC).

Why might a universal bank be better able to compete against a pure-playinvestment bank for M&A and other investment banking engagements?

Universal banks have more stable and have countercyclical business cycles and are better able to compete internationally. Universal banks, like Citigroup, were able to develop a broad-based investment banking business, hire professionals from other pure-play investment banks and use their significant lending capability as a platform to capture greater IB market share.

Why do investment banks commit to lend money to high quality corporate clients in long-term (e.g. 5-year) revolving credit facilities?

To establish and deepen relationships, and to be considered for, and possibly advantaged in competing for, financing transactions (e.g. stock and bond issuance) that the company might undertake in future years.

Which of the following best describes a permitted method through which a company could disclose material non-public information under Regulation FD? a) Company can release information in a press release in middle of the night and file 8-K with SEC at 6am, hoping it gets less attention than a daytime release b) CEO can speak freely about the information to any certified research analyst , just not directly to investors until the company's next 10-Q filing c) Company can release the information in a press release, but it must be released between 8am and 5pm New York time d) CEO can release the information on a phone call as long as at least 5 research analysts (from 5 separate institutions) are on the call at the time

a) Company can release information in a press release in middle of the night and file 8-K with SEC at 6am, hoping it gets less attention than a daytime release

Which of the following do investment banks generally not do? a) Invest the bank's capital into publicly traded stocks the bank thinks will go up b) Advise companies on mergers and acquisitions c) Help companies raise funds by managing sales of stocks and bonds d) Commit the bank's capital to provide backup financing commitments in case a planned bond deal to fund an acquisition fails

a) Invest the bank's capital into publicly traded stocks the bank thinks will go up

Which of the following is most likely to have an underwriting fee of 0.5% of capital raised? a) Investment grade bond b) IPO c) High yield bond d) Convertible bond

a) Investment grade bond

Among the following choices, which best describes areas that were highly problematic for many investment banks during the 2007-9 financial crisis? a) Mortgages, MBS, and LBO-related commitments b) Requirements to repurchase shares of previously-IPO'ed companies when the stocks fell significantly c) Equity derivatives and currency options d) Prime brokerage and hedge funds

a) Mortgages, MBS, and LBO-related commitments

Which of the following services do investment banks not provide to corporate clients issuing stock in a best-efforts offering? a) Promise to risk some of the bank's capital to buy stock in secondary trading, if necessary, to prevent the stock from falling below the issuance price for the first 60 days b) Help management create investor presentation slides c) Help the company and lawyers draft the prospectus d) Make a pricing recommendation after marketing and taking orders from investors

a) Promise to risk some of the bank's capital to buy stock in secondary trading, if necessary, to prevent the stock from falling below the issuance price for the first 60 days

Which of the following was likely not a significant factor in the collapse of Bear Stearns and Lehman Brothers in 2008? a) These banks' equities and commodities trading desks traded highly volatile stocks and, commodities and derivatives b) The banks had too much short-term financing that had to be rolled over every week or month (which reduced costs compared to borrowing for longer terms) c) These banks' short-term funding sources weren't as stable as FDIC-insured deposits, as they did not have consumer deposit taking businesses d) The banks' high leverage ratio of debt / equity

a) These banks' equities and commodities trading desks traded highly volatile stocks and, commodities and derivatives

Which of the following is an investment bank's Equity Capital Markets group least likely to do? a) Brief company's salesforce on the nature of the offering, the use of proceeds, and highlights of the investment's merits b) Argue for hours with a large investor to convince them that the correct valuation of a company is higher than they think c) Set up group meetings, 1-on-1 meetings and investor calls for investors to meet management and ask questions d) Compile indications of interest from investors for various amounts of stock at various prices

b) Argue for hours with a large investor to convince them that the correct valuation of a company is higher than they think

Of the following, which best describes some of the major drivers of investment banks' crisis during 2007-2009? a) Losses from trading oil, gas and other commodities b) Investment banks' large stock market investments c) Mortgage-related assets and bad loans d) Large swings in foreign exchange rates

c) Mortgage-related assets and bad loans

Which of the following types of transaction is usually most risky for an investment bank in terms of direct losses of money? a) Fully-marketed (3-day) follow-on offering b) Accelerated (1-day) offering of high yield ("junk") bonds c) Initial public offering d) Block trade

d) Block trade

Which of the following groups within a bank would execute an Initial Public Offering (IPO)? a) Credit Risk Management b) Leveraged Finance c) M&A d) Equity Capital Markets e) Restructuring f) Debt Capital Markets

d) Equity Capital Markets

In which of the following circumstances is an underwriter most likely to be forced to repurchase shares at the IPO price? a) Six months after the IPO, the stock is down 75% because the company's two largest customers have terminated their contract and moved their business to a competitor b) Three months after the IPO, the stock falls by 30% in a single day because the company's quarterly earnings report is disappointing c) Four months after the IPO, the stock has fallen by 80% because investors have become much less optimistic about the company's future d) Two months after the IPO, the stock has fallen 50% and the CEO and CFO have been charged with fraud by federal prosecutors

d) Two months after the IPO, the stock has fallen 50% and the CEO and CFO have been charged with fraud by federal prosecutors

List the four principal alternative methods for establishing value in an M&Atransaction.

i) Preemptive: where bankers will screen and identify the single most likely buyer and contact that buyer only.ii) Targeted Solicitation: where bankers identify and contact the two to five most likely buyers.iii) Controlled/Limited Auction: where bankers approach a subset of buyers (maybe 6-20 buyers potential buyers) who have been prescreened to be the most logical buyers.iv) Public Auction: where the company publicly announces the sales process and invites all interested parties to participate.

Compare the different roles provided to the investor community by credit ratinganalysts and sell-side research analysts.

• Credit analysts assign debt ratings that are used by investors, banks, and governments for their decisions. The issuer pays for the rating, leading to increased market efficiency, lower costs, and expanded capital supply. • Sell-side research analysts provide research to investing clients, building models to forecast a company's future earnings using various factors and multiples to assess future share price. They help clients determine whether to invest in a security.

A BBB-/Baa3 rated company is looking at acquiring a smaller (but sizeable)competitor. Discuss considerations the company should take into account whendeciding whether to fund the acquisition with new debt, equity, or convertiblesecurities.

• Debt financing: consider credit rating, financial ratios, interest rate, and cash flow. • Equity financing: consider dilution, earnings per share, and cost of issuance. • Convertible securities: consider terms, dilution, and cost of debt component. • Additional considerations: strategic importance, capital requirements, financial flexibility, growth prospects, and market conditions.

What is the difference between business risk and financial risk?

• Financial risk is the risk that a business's cash flows are not enough to pay creditors and fulfill other financial responsibilities. The level of financial risk, therefore, relates less to the business's operations themselves and more to the amount of debt a business incurs to finance those operations. Taking on higher levels of debt or financial liability therefore increases a business's level of financial risk. • Business risk refers to the chance a business's cash flows are not enough to cover its operating expenses like cost of goods sold, rent and wages. Unlike financial risk, business risk is independent of the amount of debt a business owes.

List 5 or more characteristics of companies that are good targets for an equityissuance.

• High growth potential: Companies with high growth potential are attractive to equity investors as they are expected to generate higher returns. • Strong financial performance: Companies with strong financial performance and healthy balance sheets are more likely to attract equity investors as they have a lower risk of default. • Established market position: Companies with an established market position have a competitive advantage, making them more attractive to equity investors. • Industry prospects: Companies operating in industries with favorable growth prospects are more likely to attract equity investors. • Management team: Companies with experienced and credible management teams are more attractive to equity investors as they are seen as capable of effectively utilizing capital raised through equity issuances.

Why are most corporate Eurobond issuers large, multinational corporations?

• Restricted to large, single issues ($50M+), limited to large companies, banks, and governments • Maturities usually around 10 years or less • Programs available for MNCs to issue smaller amounts and shorter periods • Helps MNCs raise foreign-denominated debt in large amounts, long periods of time, and usually at a fixed interest rate • Suitable for financing large, long-term, overseas developments

What are the "Risk Factors" in a prospectus? Why are they important to the issuerand to the investor?

• The "Risk Factors" section of a prospectus identifies potential risks associated with investing in the securities being offered. • It is required by securities laws to ensure that investors have access to accurate and complete information. • Failure to disclose material risks could result in legal action against the issuer or its officers and directors.

Securities Act of 1933

• The Securities Act of 1933 requires companies to register their securities offerings with the Securities and Exchange Commission (SEC) before they can be sold to the public. • The Act was designed to ensure that investors have access to accurate and complete information about securities offerings, and to prevent fraud and misrepresentation in the securities markets.

What is the difference between asset management and wealth management?

• Wealth management is quite broad in perspective and includes asset management services, investment management, real estate planning, tax planning, etc. • Asset management, on the other hand, is related to the management of assets and investments such as stocks, bonds, real estate and other assets • Wealth management refers to advisors who provide investment advice to selected individual, family, and institutional investing clients. Wealth management professionals create investment advisory relationships with investors and are not directly involved in the management of asset classes (role of the Asset Mangers)