Chapters 16 and 17 509

Chapter 16 True/False Questions 1. For securities firms, income from investment management is more stable than the income from underwriting or trading. Answer: True Page: 457 Level: Medium 2. Full line investment banks act as both broker dealers and securities underwriters. Answer: True Page: 455 Level: Easy 3. A private placement is allowed under SEC Rule 415 to allow large corporations to preregister an upcoming security offering for up to two years in advance. Answer: False Page: 458 Level: Medium 4. Issuers of privately placed securities must still register the issue with the SEC. Answer: False Page: 457 Level: Medium 5. In a best efforts offering the investment banker acts as an agent for the issuer rather than as a principle. Answer: True Page: 459 Level: Easy 6. A market maker buys IBM at $185 for his own account and sells the stock later in the day at $187. He is acting as a broker in this transaction. Answer: False Page: 460-461 Level: Easy 7. Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage. Answer: False Page: 461 Level: Easy

8. An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices. Answer: True Page: 461 Level: Easy 9. A stock broker acts as a principle on behalf of the customer. Answer: False Page: 461 Level: Medium 10. Securities firms often provide deposit type services through cash management accounts. Answer: True Page: 462 Level: Easy 11. Program trading is the simultaneous buying and selling of at least $1 million worth of at least 15 stocks. Answer: True Page: 461 Level: Medium 12. The major source of funds for securities firms are repurchase agreements. Answer: True Page: 466-467 Level: Easy 13. Equity capital levels of securities firms are higher than for banks since securities firms cannot offer insured deposits. Answer: False Page: 467 Level: Medium 14. One could argue that decimalization has cut dealer profit margins but may have helped increase broker profits. Answer: True Page: 461 Level: Difficult 15. The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000. Answer: False Page: 468 Level: Medium

16. In the recent past, stock research analysts received bonuses for generating allegedly biased research reports that helped to sell new issues underwritten by their firm. Answer: True Page: 463,468 Level: Easy 17. Total dollar value of debt underwriting exceeded total equity underwriting dollar volume in every year from 1990 to 2001. Answer: True Page: 465 Level: Medium

Multiple Choice Questions 18. Full line securities firms engage in all but one of the following A) Trading and brokerage of existing securities B) Corporate restructuring and advice C) Issuing new securities D) Raising money via insured deposits Answer: D Page: 453-454 Level: Easy 19. A best efforts offering is one where A) The underwriter bears the risk of an unsuccessful offering. B) The bid-ask spread is exceptionally high, but the investment banker does their best to sell the issue anyway. C) The investment banker acts as a principle for the issuer. D) The investment banker acts only as a distribution agent. E) The issue can only be privately placed. Answer: D Page: 459 Level: Easy 20. If an underwriter overestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Sell the shares back to the issuing firm at a discount. B) Lower the bid price to the issuing firm. C) Increase the fees charged to the issuing firm. D) Cancel the issue and refund the fees paid by the issuing firm. E) None of the above Answer: E Page: 459 Level: Medium

21. If an underwriter underestimates the demand for a firm's securities in a firm commitment offering the underwriter can A) Raise the offer price to the public B) Lower the bid price to the issuing firm C) Increase the fees charged to the issuing firm D) Cancel the issue E) None of the above Answer: E Page: 459 Level: Medium 22. Investment firms that pool money from individuals and/or institutions and invest equity funds in startup firms are called A) Top tier bankers B) Section 20 affiliates C) Venture capital firms D) ECNs E) Discount brokerage houses Answer: C Page: 456 Level: Easy 23. You buy French Francs in New York and simultaneously sell them in Frankfurt for a gain. This is an example of A) Position trading B) Program trading C) Pure arbitrage D) Risk arbitrage E) Hedging Answer: C Page: 461 Level: Medium 24. An unregistered issue sold to a few large institutional buyers is an example of a A) Best efforts offering B) Fully underwritten public offering C) Shelf offering D) Private placement E) SEC Rule 415 offering Answer: D Page: 468 Level: Medium

25. An investment banker agrees to a firm commitment offering of 1 million shares of Ace stock. The offer price is set at $45 and the spread is 50 cents per share. If the stock is actually sold to the public at $44 however, what is the investment banker's gain or loss? A) $1,000,000 gain B) $1,000,000 loss C) $500,000 gain D) $500,000 loss E) None of the above Answer: D Page: 459 Level: Medium 26. Day to day trading practices of securities firms currently may be regulated by which of the following? I. NASD II. SEC III. NYSE IV. SIPC A) I only B) II only C) I and II only D) I and III only E) II and IV only Answer: D Page: 468 Level: Medium 27. Firms in the securities industry are required to maintain a minimum capital to asset ratio of _____ A) 2% B) 4% C) 6% D) 8% E) 10% Answer: A Page: 467 Level: Medium

28. In 2000 and 2001 the top IPO underwriter (by $ volume) was A) Goldman-Sachs B) Merrill-Lynch C) Citigroup SSB D) J.P. Morgan Chase E) UBS Warburg Answer: B Page: 458 Level: Easy 29. The major result of NSMIA was to A) Reduce state regulatory powers over securities firms B) Establish the SIPC C) Create the NASD D) All of the above E) None of the above Answer: A Page: 467-468 Level: Easy 30. The largest source of funds for a securities firm is A) Short positions in securities and commodities B) Payables to other broker dealers C) Securities sold under repurchase agreement D) Call loans E) Securities purchased under agreements to sell Answer: C Page: 467 Level: Easy 31. _____________ are examples of investment bankers offering traditional commercial banking services. A) Online brokers B) Cash management accounts C) Underwriting corporate debt and equity offers D) Venture capital funds E) Mergers and acquisition services Answer: B Page: 462 Level: Medium

32. An investment banker may be unwilling to engage in a firm commitment offer if A) The issuer is relatively unknown to the public B) The issuer desires too low an offer price C) The investment banker is concerned about overall market price volatility D) Both A and C E) Both B and C Answer: D Page: 459 Level: Medium 33. When an underwriter engages in a firm commitment, the underwriter is acting as A) A principle B) An agent C) An asset transformer D) An M&A advisor E) All of the above Answer: A Page: 459 Level: Easy 34. Underwriter spreads will normally be larger on A) A shelf offering than on an IPO B) A best efforts offer than on an IPO C) A best efforts offer than on a seasoned offering D) An IPO than a seasoned offering E) Less risky issues Answer: D Page: 457-459 Level: Easy 35. In July 2002 the U.S. Congress passed the Corporate Governance and Accounting Oversight bill. Among other things, this bill I. Created an independent auditing oversight board run by the SEC II. Increased penalties for corporate wrongdoers III. Eliminated the use of stock options for executive compensation A) I only B) I and II only C) I and III only D) II and III only E) I, II and III Answer: B Page: 468 Level: Medium

36. From 1991 to 2001, foreign investor transactions in U.S. securities ___________ and U.S. investor transactions in foreign securities ______________. A) increased ; increased B) increased ; decreased C) decreased ; increased D) decreased ; decreased E) increased ; stayed the same Answer: A Page: 470 Level: Medium 37. The SEC primarily sets standards to regulate securities firms' A) Program trading and arbitrage strategies B) M&A and cash management activities C) Profitability and holding companies activities D) Trading and underwriting activities E) Corporate advisory and M&A activities Answer: D Page: 467-468 Level: Medium Chapter 16 True/False Questions 1. Because of the differences in the makeup of their major loan types, finance companies typically have shorter term loans than banks. Answer: True Page: 473 Level: Medium 2. The twenty largest finance companies own about 80% of the industry's assets. Answer: True Page: 475 Level: Easy 3. The first major finance company was formed by Filene's Basement to service the credit needs of its employees. Answer: False Page: 473 Level: Easy 4. An installment loan is one where all the principle is repaid at maturity. Answer: False Page: 473 Level: Easy

5. As of 2000, the largest finance company was General Motors Acceptance Corporation. Answer: False Page: 476 Level: Easy 6. The largest commercial mortgage lender in the U.S. is a finance company. Answer: True Page: 475 Level: Medium 7. Sales finance institutions specialize in loan sales to banks and thrifts. Answer: False Page: 475 Level: Medium 8. Except for certain special promotional deals, finance companies generally charge higher rates for similar loans than do commercial banks. Answer: True Page: 478 Level: Easy

9. It is generally impossible to get a mortgage loan if you have a bankruptcy on your credit record, even from a subprime lender. Answer: False Page: 479 Level: Easy 10. Finance companies are now the largest issuers in the country in the short term banker's acceptance market. Answer: False Page: 480 Level: Medium

Multiple Choice Questions 11. Which of the following are not sources of funds for finance companies? A) Bank loans B) Commercial paper C) Equity D) Deposits E) Neither C) or D) are sources of funds for a finance company Answer: D Page: 473 Level: Easy 12. Finance company loss reserves will typically be _____ percent of assets than/as a bank's loss reserves. A) A higher B) A lower C) An equal Answer: A Page: 480-481 Level: Easy 13. Finance company services include A) Consumer lending B) Business lending C) Mortgage lending D) All of the above E) A. and B. only Answer: D Page: 473 Level: Easy

14. The first major finance company was A) General Motors Acceptance B) Household Finance Corp C) General Electric Capital Corp D) First Alliance Company E) Metrics Companies Answer: C Page: 473 Level: Easy 15. A finance company makes a 48 month $15,000 installment loan to a customer. If the annual rate is quoted at 9%, which of the following monthly payments is correct? A) $138.89 B) $373.28 C) $1,371.92 D) $444.21 E) None of the above Answer: B Page: 474 Level: Medium 16. A subprime lender makes a loan to a customer. The customer is given $9000 today and she must then make twelve monthly installment payments of $860 (beginning in one month) to the lender. What rate must be quoted to the customer? A) 21.46% B) 26.05% C) 217.10% D) 32.24% E) 29.40% Answer: B Page: 474 Level: Medium 17. Factoring is A) Equipment leasing B) Servicing mortgage factors C) Purchasing corporate accounts receivables at a discount D) Financing automobile purchases E) Making installment loans to customers Answer: C Page: 475 Level: Medium

18. Sales finance companies A) Specialize in making loans to customers of a specific retailer or manufacturer B) Specialize in making installments and other loans to whatever consumers are interested C) Specialize in providing loans to businesses D) Specialize in international factoring and forfaiting E) None of the above Answer: A Page: 475 Level: Easy 19. In recent years the fastest growing area of business at finance companies has been in A) Auto lending B) Unsecured consumer loans C) Mortgages D) Leasing and business lending E) None of the above Answer: D Page: 476-477 Level: Medium 20. A finance company that makes loans to high risk customers is called a A) Subprime leader B) Commercial bank C) Factor D) Warehouse lender E) Supraprime lender Answer: A Page: 478 Level: Easy 21. A lender that loans money and charges usurious interest rates and/or fees with no credit checks is called a(n) A) Ebeneezer B) Greenmailer C) Land shark D) Bird of prey E) Loan shark Answer: E Page: 478 Level: Easy

22. Finance companies enjoy several advantages over banks. These include all but which one of the following? A) Finance companies can offer various types of products and services without regulatory interference. B) Many finance companies have considerable knowledge and expertise about specific industries and products. C) Finance companies can accept riskier customers than banks. D) Finance companies generally have lower overhead than banks. E) Finance companies have lower funds costs than banks. Answer: E Page: 476-477 Level: Medium 23. As compared to banks, the typical finance company loan portfolios I. Have a lower percentage of mortgages II. Are shorter term III. Have higher credit risk A) I only B) II only C) II and III only D) I and III only E) I, II and III Answer: E Page: 476 Level: Medium 24. Which of the following do finance companies use to signal their safety and solvency to users? A) Government insurance B) Substantial equity to asset ratios C) Letters of credit from high quality banks D) A. and B. E) B. and C. Answer: E Page: 483 Level: Medium 25. A captive finance company is one that A) Is owned by a retailer or manufacturer B) Is owned by a bank holding company C) Is owned by it depositors D) Lends only to high risk individuals that cannot obtain loans elsewhere (i.e. captives) E) Is regulated at the Federal level Answer: A Page: 476 Level: Easy

26. A local finance company allows you to give them a postdated check not cashable for two weeks for $100. In return they give you $90 today. What annual rate must be disclosed on this loan? A) 11.11% B) 288.89% C) 1447.73% D) 577.72% E) 29.00% Answer: B Page: None Level: Difficult 27. A loan agreement between Ford Motor Credit and a local Ford dealer is an example of A) Retail motor vehicle loan B) Business equipment loan C) Factoring of receivables D) Depreciation loan E) None of the above Answer: E Page: 479 Level: Medium 28. The largest full service financial institution in the country that includes a finance company is A) Citigroup B) General Electric Capital Services C) General Motors Acceptance Corporation D) American Express E) CIT Group Holdings Answer: A Page: 480 Level: Medium 29. Although finance company growth has generally been positive for the last ten years _______ _________ finance companies have recently been struggling. A) Business and captive B) Consumer and wholesale C) Subprime and electronic D) Mortgage and subprime E) Sales and business Answer: C Page: 481 Level: Medium

30. Finance companies in foreign countries A) Usually take insured deposits B) Rarely offer loans to individuals C) Raise most of their capital via issuing commercial paper D) Are more highly regulated than U.S. finance companies E) Are usually subsidiaries of local banks and dependent on their parents for capital Answer: E Page: 484 Level: Medium Chapter 17 True/False Questions 1. Over the last ten years the number of banks has been declining, but the number of mutual funds has been growing. Answer: True Page: 486 Level: Easy 2. Net new cash flows to money market mutual funds vary inversely with interest rate spreads on money market funds and savings deposits. Answer: False Page: 497 Level: Easy 3. Most of the recent growth of long term mutual funds has occurred because of the bull market of the 1990s. Answer: True Page: 489 Level: Easy 4. As of 2001 total U.S. mutual fund assets exceeded U.S. insurer's assets but were less than commercial bank total assets. Answer: True Page: 488 Level: Medium 5. The shares of a closed end fund with market value of assets of $200 million and 2 million shares outstanding will always trade at a market value of $100 per share. Answer: False Page: 496 Level: Easy

6. If invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5% load you will receive less than 200 shares in the fund. Answer: False Page: 498 Level: Medium 7. The typical household that owns mutual funds owns no more than 3 mutual funds. Answer: False Page: 491 Level: Medium 8. Each fund's prospectus is required to disclose the fund's beta risk and total risk. Answer: False Page: 494 Level: Medium 9. The market value of a fund's net assets divided by the number of mutual fund shares outstanding is called the NAV of the fund. Answer: True Page: 495 Level: Easy 10. Open end fund shares often trade at a discount or premium relative to NAV. Answer: False Page: 495 Level: Easy 11. Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc. Answer: False Page: 497-498 Level: Easy 12. A 12 b-1 fee is an implicit load charge. Answer: True Page: 498 Level: Medium 13. Of long term equity funds, municipal funds and growth and income funds are the largest categories. Answer: False Page: 493 Level: Easy 14. A drop in interest rates will usually result in an increase in the number of money market mutual fund shares.

Answer: True Page: 500 Level: Medium 15. The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry. Answer: False Page: 501 Level: Easy

Multiple Choice Questions 16. Open end mutual funds guarantee A) Investors a minimum rate of return B) Investors a minimum NAV C) To redeem investor's shares upon demand at current NAV D) To earn the rate promised in the prospectus E) None of the above Answer: C Page: 495 Level: Medium 17. As compared to purchasing a stock, a no load mutual fund investor will usually get A) Commissionless reinvestment opportunities B) Better diversification C) Free switching between funds within the same family D) Lower commissions costs E) All of the above Answer: E Page: 486 Level: Easy 18. Money market mutual funds invest primarily in A) Foreign currencies B) Real estate C) Long term bonds D) IPOs E) None of the above Answer: E Page: 501 Level: Medium 19. In terms of asset size, rank the top three U.S. financial intermediaries from largest to smallest. I. Commercial banks II. State and local government pension funds III. Private pension funds IV. Mutual funds A) I, IV, III B) I, III, II C) IV, I, II D) I, II, IV E) II, III, I

Answer: A Page: 488 Level: Medium

20. As the economy weakens, one would expect investment in _________ funds to increase and investment in __________ funds to decrease, ceteris paribus. A) Money market mutual; equity B) Equity; bond C) Municipal bond; money market mutual D) Corporate bond; Municipal bond E) Long term; short term Answer: A Page: 500 Level: Medium 21. Hybrid mutual funds normally invest significant amounts in A) Common stock B) Commercial paper C) Long term bonds D) Treasury bills E) Both A) and C) Answer: E Page: 488-489 Level: Medium 22. During 2001 investment in money market mutual funds _____ and the investment in long term mutual funds ____. A) Decreased; decreased B) Increased; increased C) Increased; decreased D) Decreased; increased E) Stayed the same; increased Answer: B Page: 486 Level: Medium 23. Money market mutual funds (MMMFs) have caused disintermediation at banks. This is because MMMFs A) Allow investors access to higher interest rate money market securities with a relatively small capital investment B) Are less risky than bank deposits C) Are now federally insured, like bank deposits D) Offer guaranteed rates of return E) None of the above Answer: A Page: 489-490 Level: Medium

24. The 'profile' of the typical mutual fund owners implies that he or she is a: I. Long term investor II. Generation Xer III. Employed IV. College graduate A) III only B) I and III only C) II, III and IV only D) I, III and IV only E) I, II, III and IV Answer: D Page: 490-491 Level: Easy 25. By type of fund, there are more _____ funds than any other. A) Equity B) Bond C) Taxable money market D) Tax exempt money market E) Hybrid Answer: A Page: 489 Level: Easy 26. The largest proportion of long term mutual fund assets are held by _____ and the largest proportion of money market mutual fund assets are held by _____. A) Bank trusts and estates, the household sector B) The household sector, private pension funds C) The household sector, the household sector D) Private pension funds, nonfinancial corporate business E) Life insurance firms, funding corporations Answer: C Page: 489 Level: Medium 27. The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the A) Load charge B) NAV C) Expense ratio D) 12b-1 fee E) Management fee Answer: B Page: 495 Level: Easy

28. Rank the following types of funds from most risky to least risky (variations exist but rank them generally) I. Growth II. Growth and income III. Money market mutual fund IV. Bond fund A) II, I, III, IV B) I, II, IV, III C) I, IV, II, III D) II, III, I, IV E) III, IV, II, I Answer: B Page: 493 Level: Easy 29. You have $5,000 to invest and you are considering investing in Fund A. The fund charges a 5.5% load and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's rate of return will be 10% per year. If you make the investment what should your investment be worth in one year? A) $5,135.48 B) $5,197.50 C) $5,500.00 D) $5,431.25 E) $5,162.50 Answer: A Page: 498 Level: Difficult Response: Investment amount = $5,000*(1-0.055) = $4,725; FV1:$4,725*1.10 = $5,197.5; Average assets = ($4,725+$5,197.5)/2 = 4,961.25; $4,961.25*0.0125= $62.01; $5,197.5 – $62.01=$5,135.48 30. A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be A) An open ended fund B) A closed end fund C) A balanced fund D) An aggressive growth fund E) A money market mutual fund Answer: B Page: 496 Level: Medium

31. An open end mutual fund owns 1000 share of Krispy Kreme priced at $40. The fund also owns 2000 shares of Ben & Jerry's priced at $55, and 1000 shares of Pepsi priced at $45. The fund itself has 3000 of its own shares outstanding. What is the NAV of a fund's share? A) $65 B) $55 C) $45 D) $35 E) $25 Answer: A Page: 495 Level: Medium Response: [(1000*40) + (2000*55) + (1000*45)] / 3000 fund shares 32. You have $8,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 5.5% load, a 1% management fee and a 0.25% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year end assets. The gross annual return on the fund's shares was 12%. What was your net annual rate of return to the nearest basis point? A) 3.26% B) 6.50% C) 6.25% D) 4.52% E) 4.02% Answer: D Page: 497-498 Level: Difficult Response: {{[$8,000*(1-0.055) *1.12] * (1-0.0125)} / $8,000} – 1 33. Investors pay load changes to receive A) Higher returns on their investments B) Additional services from funds C) Voting shares of stock D) Advice on which fund to buy E) 12B-1 remunerations Answer: D Page: 497 Level: Medium 34. A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen? A) The fund's NAV will rise from $100 to $105 B) The fund's NAV per share will rise from $1 to $1.05 C) The fund will issue a total of 5 new shares D) The fund's NAV will fall 5% E) The fund will close to new investors Answer: C Page: 500 Level: Medium

35. The primary regulator of mutual funds is the A) NASD B) CFTC C) NYSE D) SEC E) NSMIA Answer: D Page: 501 Level: Easy