Reference Book: Investment Banks, Hedge Funds and Private Equity. By David Stowell

Chapter 1 - 3

Question 1 Why do investment banks commit to lend money to high quality corporate clients in long-term (e.g. 5-year) revolving credit facilities? Group of answer choices a) 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. b) To allow the companies to produce goods like office furniture and computers, which investment banks purchase in bulk. c) To earn a good investment grade d) To earn money (net interest margin) in low-risk lending Question 2 Which of the following do investment banks generally not do? Group of answer choices a) Invest the bank's capital into publicly traded stocks the bank thinks will go up b) Advise companies on mergers and acquisitions c) Commit the bank's capital to provide backup financing commitments in case a planned bond deal to fund an acquisition fails d) Help companies raise funds by managing sales of stocks and bonds Question 3 What did Glass-Steagal require from approximately 1933 to 1999? Group of answer choices a) Acquisitions of public companies may only be done at a premium of between 20% and 49.9% to where the stock was trading prior to announcement b) Separation of deposit-taking commercial banks from securities related businesses such as underwriting and trading c) Investment bankers' bonuses must be at least 60% in bank stock and require a long holding period, instead of being paid in cash upfront d) Banks must have (at least) glass walls between trading and investment banking Question 4 Which of the following was likely not a significant factor in the collapse of Bear Stearns and Lehman Brothers in 2008? Group of answer choices a) 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) b) The banks' high leverage ratio of debt / equity c) These banks' equities and commodities trading desks traded highly volatile stocks and, commodities and derivatives d) These banks' short-term funding sources weren't as stable as FDIC-insured deposits, as they did not have consumer deposit taking businesses Question 5 What type of U.S. securities offerings do not need to be registered with the SEC? Group of answer choices a) Warrants (call options) with maturity between 1 and 10 years b) Private offerings under Rule 144A to an unlimited number of qualified institutional buyers c) Offerings of common stocks which have ALL of (i) >1 year since IPO, (ii) >$10 million average daily trading volume, and (iii) >$700 million of public float d) Private offerings under Rule 144(i) to up to 15 qualified institutional buyers Question 6 Which of the following best describes a permitted method through which a company could disclose material non-public information under Regulation FD? Group of answer choices a) Company can release the information in a press release, but it must be released between 8am and 5pm New York time b) 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 c) 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 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 Question 7 In which of the following circumstances is an underwriter most likely to be forced to repurchase shares at the IPO price? Group of answer choices a) Four months after the IPO, the stock has fallen by 80% because investors have become much less optimistic about the company's future b) Two months after the IPO, the stock has fallen 50% and the CEO and CFO have been charged with fraud by federal prosecutors c) Three months after the IPO, the stock falls by 30% in a single day because the company's quarterly earnings report is disappointing b) 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 Question 8 What are the most common uses of Rule 144A in large securities offerings? Group of answer choices a) Forcing an underwriter to repurchase securities at the original sale price b) Issuance of common stock c) Issuance of bonds and convertible bonds d) Issuance of mandatory convertible securities Question 9 What are the most common uses of Rule 144 (NOT Rule 144A)? Group of answer choices a) Suing a company for misleading statements in its prospectus b) Hedging listed options c) Sales of previously-restricted common stock in block trades or normal brokerage transactions d) Issuance of high yield bonds Question 10 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? Group of answer choices a) 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 b) If the stock exchange has delays in settling the deal, the investment bank lends funds to the company for up to 30 days c) The investors wire funds to the company and the company creates a stock certificate for each investor d) The company doesn't need to do anything; the stock exchange handles the mechanics Question 11 Which of the following laws primarily regulates the issuance of new securities? Group of answer choices a) The Securities and Exchange Act of 1934 b) The Securities Act of 1933 c) The 22nd Amendment d) Glass-Steagal Question 12 Which of the following types of transaction is usually most risky for an investment bank in terms of direct losses of money? Group of answer choices a) Block trade b) Fully-marketed (3-day) follow-on offering c) Accelerated (1-day) offering of high yield ("junk") bonds d) Initial public offering Question 13 Which of the following is an investment bank's Equity Capital Markets group least likely to do? Group of answer choices a) Argue for hours with a large investor to convince them that the correct valuation of a company is higher than they think b) Compile indications of interest from investors for various amounts of stock at various prices c) Set up group meetings, 1-on-1 meetings and investor calls for investors to meet management and ask questions d) Brief company's salesforce on the nature of the offering, the use of proceeds, and highlights of the investment's merits Question 14 Among the following choices, which best describes areas that were highly problematic for many investment banks during the 2007-9 financial crisis? Group of answer choices a) Mortgages, MBS, and LBO-related commitments b) Requirements to repurchase shares of previously-IPO'ed companies when the stocks fell significantly c) Prime brokerage and hedge funds d) Equity derivatives and currency options Question 15 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? Group of answer choices a) 2-3 years b) Less than 1 month c) 1-3 months d) 4-6 months Question 16 Which of the following services do investment banks not provide to corporate clients issuing stock in a best-efforts offering? Group of answer choices a) Help the company and lawyers draft the prospectus b) Make a pricing recommendation after marketing and taking orders from investors c) Help management create investor presentation slides d) 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 Question 17 Which of the following is most likely to have an underwriting fee of 0.5% of capital raised? Group of answer choices a) Investment grade bond b) High yield bond c) Convertible bond d) IPO Question 18 What is a secondary offering of common stock? Group of answer choices a) An organized underwritten sale of existing shares owned by a large shareholder b) The second public offering of stock by a company, often 6-12 months after the initial public offering (IPO) c) An offering that is primarily comprised of bonds or convertible bonds, with only a small amount of common stock included d) The sale of a second class of common stock, e.g. class B stock with more or less voting power than the stock originally offered in the IPO Question 19 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. Group of answer choices True False Question 20 The top 9-12 global investment banks usually make more revenue from underwriting stocks and bonds than from their sales & trading businesses. Group of answer choices True False Question 21 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. Group of answer choices True False Question 22 For many types of projects, investment banks charge clients per hour spent, similar to consultants or lawyers, as they produce analysis requested by clients. Group of answer choices True False Question 23 Investment banks never lose money on any type of underwriting transaction. Group of answer choices True False Question 24 People working in Equity Capital Markets or Debt Capital Markets are generally not allowed to have material non-public information about public companies. Group of answer choices True False Question 25 Investment banks invest more money in the markets than institutional investors. Group of answer choices True False