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Banking
Q:
If a bank has more rate-sensitive liabilities than rate-sensitive assets, then a(n) ________ in interest rates will ________ bank profits.
A) increase; increase
B) increase; reduce
C) decline; reduce
D) decline; not affect
Q:
Liabilities that are partially, but not fully, rate-sensitive include ________.
A) checkable deposits
B) federal funds
C) non-negotiable CDs
D) fixed-rate mortgages
E) money market deposit accounts
Q:
Which of the following are not generally rate-sensitive assets?
A) securities with a maturity of less than one year
B) variable-rate mortgages
C) fixed-rate mortgages
D) all of the above are rate-sensitive assets
E) none of the above are rate-sensitive assets
Q:
When banks offer borrowers smaller loans than they have requested, banks are said to ________.
A) shave credit
B) discount the loan
C) raze credit
D) ration credit
Q:
Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks
A) ration credit, granting borrowers smaller loans than they have requested.
B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans.
C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans.
D) do none of the above.
Q:
Credit rationing occurs when a bank
A) refuses to make a loan of any amount to a borrower, even when she is willing to pay a higher interest rate.
B) restricts the amount of a loan to less than the borrower would like.
C) does either A or B of the above.
D) does neither A nor B of the above.
Q:
When a lender refuses to make a loan, even though borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in ________.
A) specialized lending
B) strategic refusal
C) diversified lending
D) coercive behavior
E) none of the above
Q:
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in ________.
A) constrained lending
B) strategic refusal
C) credit rationing
D) collusive behavior
Q:
Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the requirement that
A) firms keep compensating balances at the banks from which they obtain their loans.
B) firms place on their board of directors an officer from the bank.
C) loan contracts include restrictive covenants.
D) individuals provide detailed credit histories to bank loan officers.
Q:
A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to
A) place a bank officer on their board of directors.
B) place a corporate officer on the bank's board of directors.
C) keep compensating balances in a checking account at the bank.
D) do all of the above.
E) do only A and B of the above.
Q:
Compensating balances
A) are a particular form of collateral commonly required on commercial loans.
B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank.
C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions.
D) are all of the above.
Q:
Lines of credit and long-term relationships between banks and their customers
A) reduce the costs of information collection.
B) make it easier for banks to screen good risks from bad.
C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants.
D) do all of the above.
E) do only A and B of the above.
Q:
A bank's commitment (for a specified future period of time) to provide a firm with loans up to a given amount at an interest rate that is tied to a market interest rate is called
A) credit rationing.
B) a line of credit.
C) continuous dealings.
D) none of the above.
Q:
Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks
A) specialize in lending to certain industries or regions.
B) write restrictive covenants into loan contracts.
C) expend resources to acquire accurate credit histories of their potential loan customers.
D) do all of the above.
Q:
Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.
A) proscription bonds
B) collateral clauses
C) restrictive covenants
D) liens
Q:
From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.
A) moral hazard; diversification
B) diversification; moral hazard
C) adverse selection; diversification
D) diversification; adverse selection
Q:
In one sense, ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
Q:
Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as
A) screening and monitoring of loan applicants.
B) collateral and compensating balances.
C) credit rationing.
D) all of the above.
E) only A and B of the above.
Q:
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
A) adverse selection problem.
B) lemon problem.
C) adverse credit risk problem.
D) moral hazard problem.
Q:
If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects, banks face the problem of ________.
A) adverse credit risk
B) adverse selection
C) moral hazard
D) conflict of interest
Q:
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.
A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
Q:
Discuss the advantages of a private equity buyout.
Q:
How do venture capital firms overcome the problem of information asymmetries that accompany start-up firms?
Q:
What niche in the financial system do venture capital firms fill?
Q:
Describe the differences between securities brokers and securities dealers.
Q:
Explain why private placements of securities are an attractive way of raising funds for some firms.
Q:
How do best efforts agreements and private placements differ from the usual process of underwriting new securities issues?
Q:
What is underwriting?
Q:
What services do investment bankers provide for firms that are issuing new securities?
Q:
Explain how rulings by the courts and regulators have made the markets served by both commercial and investment banks more competitive.
Q:
Within the broad universe of private equity sectors, the two most common are venture funds and capital buyouts.
Q:
In a typical private equity buyout, a partnership is formed and private equity investors are contacted to pledge participation.
Q:
An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income.
Q:
Investors in venture capital firms expect to profit quickly from their investment.
Q:
Venture capital firms reduce risk by investing in only a few companies which can be carefully monitored and nurtured.
Q:
An investment pool is formed to manipulate the market for a stock by spreading false rumors about the health of the firm.
Q:
The Securities Acts Amendment of 1975 abolished fixed commissions.
Q:
Junk bonds are high-risk, high-return equity securities that were used primarily to finance takeover attempts.
Q:
One disadvantage of the private placement of securities issues is the high cost of registering the issue.
Q:
Investment bankers perform a number of tasks required to sell securities to the public, among them pricing the security, preparing the filings required by the SEC, arranging for the security to be rated, and marketing the security through their contacts with brokerage houses.
Q:
Private placements are more common for the sale of stocks than for bonds.
Q:
Resisted takeovers are called hostile.
Q:
Investment banks form syndicates to reduce the risk involved in selling new securities.
Q:
An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest among their customers to sell all the securities by the issue date.
Q:
When a firm issues stock for the first time in an initial public offering, it is difficult for an investment bank to determine what the correct price should be.
Q:
The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers.
Q:
Which of the following is a description of a private equity firm?
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.
Q:
There are ________ risk and ________ returns to investors in private equity buyouts.
A) high; low
B) low; high
C) high; high
D) low; low
Q:
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
Q:
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.
Q:
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
Q:
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
Q:
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
Q:
The 20-year average return of venture capital firms has been about ________.
A) 50%
B) 8%
C) 20%
D) 100%
Q:
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.
Q:
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
Q:
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.
Q:
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
Q:
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
Q:
Venture capital firms are usually organized as ________.
A) closed-end mutual funds
B) limited partnerships
C) corporations
D) nonprofit businesses
Q:
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
Q:
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
Q:
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.
Q:
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.
Q:
The largest full-service broker is ________.
A) Bank of America Merrill Lynch
B) Charles Schwab Corp.
C) Ameritrade
D) Smith Barney
Q:
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.
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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.
Q:
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.
Q:
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.
Q:
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
Q:
________ 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
Q:
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
Q:
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
Q:
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.