Chapter 22

54) Which of the following is the first phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C.

A) A limited partnership is formed and funds are raised.

53) The first true venture capital firm was ________, established in 1946 by MIT president Karl Compton and local business leaders. A) American Research & Development (ARD) B) Charles River Development C) Redsocks Capital D) the MIT Fund

A) American Research & Development (ARD)

36) Which of the following best explains the difference between brokers and dealers? A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices. B) Dealers are pure middlemen; brokers make markets by standing ready to buy and sell at given prices. C) Dealers link up buyers and sellers, but do not stand ready to buy and sell from their inventories of securities; brokers stand ready to buy and sell from their inventories of securities. D) There is no difference between brokers and dealers.

A) Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices.

59) Which of the following is a characteristic feature of venture capital firms? A) Developing a portfolio of companies B) Holding debt in the firms that are funded C) Allowing firms to use the funds as they see fit D) Having a short-term investment horizon

A) Developing a portfolio of companies

58) Which of the following is not a characteristic feature of venture capital firms? A) Funding just one or a small number of firms B) Holding equity in the firms that are funded C) Having a long-term investment horizon D) Providing advice and assistance to the firms that are funded

A) Funding just one or a small number of firms

32) ________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market. A) Investment banks; securities brokers and dealers B) Securities brokers and dealers; investment banks C) Securities brokers; securities dealers D) Securities dealers; securities brokers

A) Investment banks; securities brokers and dealers

22) In a ________ 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. A) best efforts B) brokered C) private-placement D) jump-start

A) best efforts

33) The securities sales, the ________ price is the price that the broker pays for securities they buy for their inventory. A) bid B) ask C) midpoint D) transaction

A) bid

48) An investment pool is formed to A) manipulate the market by spreading false rumors. B) lower brokerage fees by combining security purchases. C) share investment advice among member investors. D) take advantage of tax breaks introduced by the 1933 and 1934 securities acts.

A) manipulate the market by spreading false rumors.

49) A securities dealer stands ready to make a market in the security at any time. For this reason, dealers are also called ________. A) market makers B) "brokers and dealers" C) liquidity traders D) demand dealers

A) market makers

6) Investment banks sell ________ securities to the public, and brokerage firms sell ________ securities to the public. A) new; existing B) new and existing; existing C) existing; new D) existing; new and existing

A) new; existing

2) In a ________, new issues of a security are sold to buyers by the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market

A) primary market

46) The largest full-service broker is ________ with about 17,000 financial advisors and $2.2 trillion in client assets. A) Bank of America Merrill Lynch B) Charles Schwab Corp. C) Ameritrade D) Smith Barney

A) Bank of America Merrill Lynch

45) Which of the following statements about cash management accounts (CMAs) are true? A) The cash management account was developed in 1977 by Merrill Lynch. B) The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities. C) As a result of CMAs, the distinction between banking activities and the activities of nonbank financial institutions has become more clearly defined. D) All of the above are true. E) Only A and B of the above are true.

E) Only A and B of the above are true. A) The cash management account was developed in 1977 by Merrill Lynch. B) The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities.

24) Private placements A) do not require the services of investment bankers. B) need not be registered with the SEC. C) are more common in the sale of stocks than for bonds. D) all of the above. E) are only A and B of the above.

E) are only A and B of the above. A) do not require the services of investment bankers. B) need not be registered with the SEC.

37) Securities dealers A) hold inventories of securities, which they sell to customers who want to buy. B) hold securities that they have purchased from customers who wanted to sell. C) are called market takers, as they have significantly cut into the market that brokers used to dominate. D) do all of the above. E) do only A and B of the above.

E) do only A and B of the above. A) hold inventories of securities, which they sell to customers who want to buy. B) hold securities that they have purchased from customers who wanted to sell.

26) The buyers of private placement issues are most likely to be ________. A) insurance companies B) pension funds C) investment banks D) all of the above E) only A and B of the above

E) only A and B of the above A) insurance companies B) pension funds

15) 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 ________. A) prospectus B) proxy statement C) fiduciary warrant D) debenture

A) prospectus

50) If an investment is liquid, it can be sold ________. A) quickly B) anonymously C) only on "rainy" days D) through a full-service broker

A) quickly

60) The sources of venture capital funding have A) shifted from wealthy individuals to pension funds and corporations. B) shifted from pension funds and corporations to wealthy individuals. C) decreased since 1990. D) done none of the above.

A) shifted from wealthy individuals to pension funds and corporations.

16) Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a ________. A) tombstone B) marker C) prospectus D) registration statement

A) tombstone

65) The ________ of the volume handled by brokers and dealers is in the publicly held securities. A) vast majority B) low percentage C) total amount D) none of the above

A) vast majority

51) A ________ is a specialized firm that finances young, start-up companies. A) venture capital firm B) finance company C) small-business finance company D) capital-creation company

A) venture capital firm

55) Which of the following is the second phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C.

B) Funds are invested in start-up companies.

20) The largest U.S. underwriter of global debt and equity issues, as of 2009, was ________. A) Merrill Lynch B) J.P. Morgan C) Morgan Stanley D) Goldman Sachs

B) J.P. Morgan

31) The best known investment banker involved in mergers and acquisitions, credited with inventing the junk bond market, is ________. A) Ivan Boesky B) Michael Milken C) James Garner D) Michael Douglas

B) Michael Milken

67) Which of the following is an advantage to a private equity buyout? A) They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act. B) The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies. C) Both A and B. D) Neither A nor B.

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

34) The securities sales, the ________ price is the price that the broker receive when they sell the securities. A) bid B) ask C) midpoint D) transaction

B) ask

64) Since the stock market decline in 2000, the number of companies funded and the total funds invested by venture capital firms have ________. A) held steady B) declined C) increased slightly D) increased sharply

B) declined

18) From an investment banker's perspective, the best outcome occurs when a new issue is ________. A) undersubscribed B) fully subscribed C) oversubscribed D) syndicated

B) fully subscribed

1) An investment bank is a financial institution that A) bundles small deposits into larger loans. B) helps corporations raise funds. C) holds most of its assets in commercial paper. D) does all of the above. E) does only A and B of the above.

B) helps corporations raise funds.

17) Most investment banks are attached to A) large commercial banks. B) large brokerage houses. C) finance companies. D) large nonfinancial corporations.

B) large brokerage houses.

57) Venture capital firms are usually organized as ________. A) closed-end mutual funds B) limited partnerships C) corporations D) nonprofit businesses

B) limited partnerships

47) A full-service broker offers its clients all of the following except A) execution of trades on request. B) low transaction fees. C) research and investment advice. D) development of long-term customer relationships.

B) low transaction fees.

41) An instruction to a securities agent to buy or sell the security at the current market price is called a ________. A) limit order B) market order C) stop loss order D) margin order

B) market order

11) Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called ________. A) secondary issues B) seasoned issues C) outstanding issues D) experienced issues

B) seasoned issues

3) In a ________, a security is sold between investors, and does not (necessarily) involve the corporation or government agency ultimately using the funds. A) primary market B) secondary market C) capital market D) money market

B) secondary market

23) Under best efforts underwriting, the underwriter A) pays for the entire security issue. B) sells the security on a commission basis. C) spreads the risk among different brokerage houses. D) makes a special appeal to the Securities and Exchange Commission to delay the issue.

B) sells the security on a commission basis.

61) A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund. A) large; small B) small; large C) large; large D) small; small

B) small; large

21) 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 ________. A) alliance B) syndicate C) association D) guild

B) syndicate

68) 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. A) the shareholders B) the managing partners C) no one D) both A and B

B) the managing partners

63) The 20-year average return of venture capital firms has been about ________. A) 56% B) 8% C) 24% D) 102%

C) 24%

25) The most active investment banking firm in the private placement market is ________. A) Merrill Lynch B) Lehman Brothers C) Goldman Sachs D) Morgan Stanley

C) Goldman Sachs

40) Which of the following is not a service securities brokers offer their clients? A) Holding customers' stock for safekeeping B) Providing insurance against loss of the securities C) Providing insurance against loss of value of the securities D) Extending margin credit

C) Providing insurance against loss of value of the securities

56) Which of the following is the third and final phase in the life cycle of a venture capital deal? A) A limited partnership is formed and funds are raised. B) Funds are invested in start-up companies. C) The venture firm exits the investment. D) The venture firm seeks approval from the S.E.C.

C) The venture firm exits the investment.

52) Which of the following provides funds to companies not yet ready to sell securities to the public? A) Investment banks B) Securities brokers and dealers C) Venture capital firms D) None of the above

C) Venture capital firms

66) With private investing, A) capital is raised by selling securities to the public. B) capital is raised by issuing new shares of stock. C) a limited partnership is formed that raises money from a small number of high-wealth investors. D) all of the above occur

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

44) To take advantage of anticipated stock price decreases, an investor would use ________. A) a market order B) a limit order C) a short sell D) margin credit

C) a short sell

19) Investment banks may lose ________ if new securities issues are ________. A) large amounts of money; oversubscribed B) large amounts of money; fully subscribed C) future business; oversubscribed D) future business; undersubscribed

C) future business; oversubscribed

7) The primary function of investment banks is A) the bundling of deposits into loans. B) extending long-term credit to other financial institutions. C) helping corporations raise funds. D) providing credit to firms engaged in international trade.

C) helping corporations raise funds.

69) There are ________ risk and ________ returns to investors in private equity buyouts. A) high; low B) low; high C) high; high D) low; low

C) high; high

35) In a primary market, ________ sell new issues of securities; in a secondary market, ________ assist in trading previously issued securities. A) securities dealers; securities brokers B) securities brokers; securities dealers C) investment banks; securities brokers and dealers D) securities brokers and dealers; investment banks

C) investment banks; securities brokers and dealers

43) An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a ________. A) short sell B) market order C) limit order D) stop loss order

C) limit order

14) SEC registration is A) required for all securities. B) required if less than $1.5 million in securities are issued per year. C) not required for securities that are sold through a private placement. D) required if the securities mature in less than one year. E) not required if securities are underwritten by a reputable investment bank.

C) not required for securities that are sold through a private placement.

12) The process of underwriting a stock or bond issue requires that the investment bank A) assure investors that the issue will provide them a high return. B) purchase the entire issue at a predetermined price if the quantity demanded by consumers is insufficient at the predetermined price. C) purchase the entire issue at a predetermined price and then resell it in the market. D) do both A and B of the above.

C) purchase the entire issue at a predetermined price and then resell it in the market.

5) During the Depression, about ________ banks failed (about 40% of all commercial banks). A) 500 B) 1,000 C) 5,000 D) 10,000

D) 10,000

70) Which of the following is a description of a public firm acquired by a private equity investment? A) Public shares are retired. B) A public company goes private. C) The firm is no longer subject to controls and oversight required of publicly held companies. D) All of the above are correct.

D) All of the above are correct.

62) Which of the following statements about venture capital funding is not correct? A) Exiting an investment can occur through an initial public offering or by merger or acquisition. B) Venture capital investing is highly risky. C) Venture capital firms may focus on a limited geographic area or on specific industries to facilitate monitoring their investments. D) Firms hope to exit a start-up firm in 3-5 years.

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

30) 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? A) Preparation of a confidential memorandum B) Negotiation of a letter of intent C) Preparation of a definitive agreement D) Forming a syndicate of purchasers

D) Forming a syndicate of purchasers

9) Which is not an activity of investment banks? A) Underwriting new issues of corporate stocks and bonds B) Acting as deal makers in mergers C) Acting as intermediaries in the buying and selling of businesses or parts of businesses D) Underwriting new issues of federal government bonds

D) Underwriting new issues of federal government bonds

27) The buyers of private placement securities are most likely to be ________. A) insurance companies B) pension funds and mutual funds C) commercial banks D) all of the above E) only A and B of the above

D) all of the above

10) Tasks that investment bankers perform when acting as underwriters to sell securities to the public include A) pricing the security. B) preparing the filings required by the Securities and Exchange Commission. C) arranging for the security to be rated. D) all of the above. E) only A and B of the above

D) all of the above.

13) The registration statement the securities underwriter files with the SEC contains information about A) the firm's financial condition, management, competition, industry, and experience. B) how the funds will be used. C) management's assessment of the risk of the securities. D) all of the above. E) only A and B of the above.

D) all of the above.

29) Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included A) helping firms that want to acquire another firm locate a firm to pursue. B) helping would-be acquirers solicit shareholders through a tender offer. C) helping target firms ward off undesired takeover attempts. D) all of the above. E) only A and B of the above.

D) all of the above.

4) The Glass-Steagall Act A) separated commercial and investment banking. B) made it illegal for a commercial bank to buy or sell securities on behalf of its customers. C) made it illegal for investment banks to engage in the underwriting of corporate securities. D) did all of the above. E) did only A and B of the above.

D) did all of the above.

38) Securities dealers A) sell securities out of their inventories to customers who want to buy. B) buy securities, which they add to their inventories, from customers who want to sell. C) are largely responsible for the health and growth of small businesses in the United States. D) do all of the above. E) do only A and B of the above.

D) do all of the above.

8) The primary function of investment banks is to A) extend credit to stock brokers and dealers. B) extend credit to investors. C) extend credit to corporations. D) help corporations issue new securities.

D) help corporations issue new securities.

39) By making a market in thinly traded stocks, securities dealers solve the ________ trading problem, which is of particular benefit to ________ businesses. A) synchronous; large B) synchronous; small C) nonsynchronous; large D) nonsynchronous; small

D) nonsynchronous; small

42) An instruction to a securities agent to sell a stock when it reaches a specific price is a ________. A) short sell B) market order C) limit order D) stop loss order

D) stop loss order

28) Which of the following statements about private placements are true? A) Private placements are more common for the sale of bonds than for stocks. B) Investment bankers, though not required for a private placement, often facilitate the transaction. C) Investment bankers help the issuing firm file the paperwork required by the SEC. D) All of the above are true. E) Only A and B of the above are true.

E) Only A and B of the above are true. A) Private placements are more common for the sale of bonds than for stocks. B) Investment bankers, though not required for a private placement, often facilitate the transaction.