Q&A Hero

Q: You have $12,500 to invest and you are considering investing in Fund X. The fund charges a front-end load of 3% and an annual expense fee of 2.25% of the ending asset value over the year. You believe the fund's gross rate of return will be 8% per year. If you make the investment, what should your investment be worth in one year? A. $12,125.20 B. $13,095.00 C. $12,654.80 D. $12,800.36 E. $13,162.50

Q: The primary regulator of mutual funds is the A. NASD. B. CFTC. C. NYSE. D. SEC. E. NSMIA.

Q: 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.

Q: Investors pay load charges 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.

Q: You have $16,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 4% front 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 9%. What was your net annual rate of return to the nearest basis point? A. 3.33% B. 7.64% C. 6.25% D. 4.52% E. 4.64%

Q: An open-end mutual fund owns 1500 share of Krispy Kreme priced at $12. The fund also owns 1,000 shares of Ben & Jerry's priced at $43, and 2,000 shares of Pepsi priced at $50. The fund itself has 3,500 of its own shares outstanding. What is the NAV of a fund's share? A. $66 B. $56 C. $46 D. $36 E. $26

Q: 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.

Q: You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. If you make the investment, what should your investment be worth in one year? A. $10,135.48 B. $10,337.46 C. $10,461.75 D. $10,556.23 E. $10,578.92

Q: Rank the following in asset size from largest to smallest in 2010. I. Mutual funds II. Insurance companies III. Commercial banks A. I, II, III B. I, III, II C. II, III, I D. III, II, I E. III, I, II

Q: 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.

Q: The largest proportion of long-term mutual fund assets is held by ___________________. A. bank trusts and estates B. the household sector C. nonfinancial corporate business D. private pension funds E. life insurance firms

Q: 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

Q: Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following? I. Lower expense ratios at index funds II. Higher turnover ratios at index funds III. Differences in returns in sectors of the market and the overall market return A. II only B. I and III only C. I and II only D. II and III only E. I, II, and III

Q: Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs A. sometimes pay higher interest rates than bank deposits. 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

Q: About ___________ of retirement plan investments are in so-called institutional funds, which are funds that manage retirement plans for an institution's employees. A. 40% B. 50% C. 60% D. 70% E. 80%

Q: 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

Q: 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

Q: ETFs are a direct competitor to ___________. A. hedge funds B. money market mutual funds C. REITS D. index funds E. market neutral funds

Q: Hedge funds charge expense fees and performance fees. The average performance fee on hedge funds is ____________. A. 5% B. 10% C. 15% D. 20% E. 25%

Q: 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

Q: The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry.

Q: Hedge funds and REITS often employ significant amounts of leverage, but standard open-end mutual funds do not.

Q: Households are the largest owner of money market mutual funds.

Q: A 12b-1 fee is an implicit load charge.

Q: Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc., than no load funds.

Q: Open-end fund shares often trade at a discount or premium relative to NAV.

Q: 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.

Q: Offshore hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.

Q: Because of their ability to hedge, the subprime mortgage crisis did not cause any significant losses to hedge funds.

Q: If you invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5% back-end load, you will receive less than 200 shares in the fund.

Q: 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.

Q: A hedge fund that goes long in a convertible bond and short in the equity of the same firm is employing a market neutral arbitrage strategy.

Q: Hedge funds can short sell securities, whereas most mutual funds cannot.

Q: Funds that specialize in municipal bonds and certain types of real estate to minimize tax liabilities are called hybrid funds.

Q: Darby Minerals wants to hire an investment banker to sell 2 million shares of stock to the public. Darby is considering using either a firm commitment or a best efforts offering.a) If Darby goes with a firm commitment, the offer price will be $15.00 per share and the spread will be 25 cents a share and all 2 million shares will be sold. The actual sale price to the public is $14.55.b) Suppose that Darby uses a best efforts offering. The actual sale price to the public is again $14.55 and the investment banker charges 4 cents per share sold as commission. Assume that in the best efforts offer only 1.85 million shares can be sold.What are the proceeds to Darby from the sale of stock in the firm commitment and the best efforts and what is the investment banker's gain or loss in each case? Ignore any other costs and expenses.

Q: What did the Sarbanes-Oxley Act do to try and prevent additional scandals at corporations? What more needs to be done to prevent additional scandals among investment bankers?

Q: Why did profitability of security firms drop precipitously in 2005 and rebound in 2006 only to fall again in 2007?

Q: What are soft dollar fees or commissions? How can these lead to conflicts of interest for investment bankers?

Q: Classify the following trading activities as either a position trade, a pure arbitrage trade, or a risk arbitrage trade. I. Buy Intel at $120 and hold it for six months in hopes of a price rise.

Q: Describe an agency transaction (brokerage) and a principal transaction (dealer) that is involved in trading. What determines profits in each activity? Which is riskier?

Q: Why is capital a more important measure of the size of a securities firm than the amount of assets? What other measures would be useful given the diversity of this industry?

Q: What are the major types of firms in the investment banking industry? Briefly describe each.

Q: The anti-money laundering provisions of the U.S.A. Patriot Act requires securities firms to I. verify the identity of any person seeking to open an account with their firm. II. keep separate records of accounts originating from foreign countries. III. determine whether the client appears on any lists of known or suspected terrorists or terrorist organizations. A. I only B. III only C. I and II only D. II and III only E. I, II, and III

Q: As a result of the alleged conflicts of interest between analysts and underwriting, which of the following changes were implemented? I. Analysts cannot participate in, nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue. II. Analyst compensation can no longer be tied to the amount of underwriting business a firm generates. III. Securities firms must divest stock research divisions to ensure independence from their investment banking business. A. I only B. I and II only C. I and III only D. II and III only E. I, II, and III

Q: The largest liability of broker dealers in 2010 was A. bank loans payable. B. short positions in securities and commodities. C. subordinated debt. D. repurchase agreements. E. equity.

Q: The largest asset on the typical securities firms' balance sheet in 2010 was A. receivable from other broker-dealers. B. long positions in securities and commodities. C. reverse repurchase agreements. D. repurchase agreements. E. cash.

Q: Which one of the following securities firms' activities is normally the most risky? A. Best efforts offering B. Private placement C. Firm commitment offering D. Pure arbitrage E. Program trading

Q: In 2010, the top five underwriters engaged in about _____________ of total U.S. underwriting volume. A. 15% B. 22% C. 34% D. 44% E. 56%

Q: The _________________ insures losses of funds deposited with securities firms in the event of failure of a securities firm. A. SEC B. NASD C. SIA D. SIPC E. FDIC

Q: In 2009, the greatest dollar volume of U.S. corporate underwriting occurred for which type of security? A. Straight corporate debt B. Asset-backed debt C. Common stock D. Preferred stock E. Convertible debt

Q: Which one of the following statements about venture capitalists is not correct? A. Venture capitalists contribute to equity financing rather than make loans. B. Venture capitalists are passive investors. C. Most private venture capitalists are organized as limited partnerships. D. The federal government licenses some private firms to provide lower cost funds to entrepreneurs. E. Angel venture capitalists are wealthy individuals who fund business startups.

Q: In July 2002, the U.S. Congress passed the Sarbanes-Oxley 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

Q: An entrepreneur looking for financing to get her small, personally-owned business up and running should probably consider A. an IPO. B. a seasoned stock offering. C. a public debt offering. D. a venture capitalist. E. a syndicated loan.

Q: The trading activity involving purchases of large blocks of securities on the expectation of a favorable price move over the next several weeks or months is called A. program trading. B. pure arbitrage. C. day trading. D. position trading. E. hedging.

Q: _____________ 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

Q: An investment banker agrees to a best efforts offering of 2.5 million shares of Crew stock. The offer price is set at $35 per share. If the stock is actually sold to the public at $34.50 and the banker charges a 3.45 cent commission per share sold, what is the amount of funds Crew receives? (Ignore any other fees or expenses.) A. $88,750,000 B. $87,500,000 C. $86,163,750 D. $85,176,430 E. $84,122,560

Q: The major result of the 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

Q: An investment banker agrees to a firm commitment offering of 1.2 million shares of Bally stock. The offer price is set at $25.50 and the spread is 30 cents per share. If the stock is actually sold to the public at $26.00 however, what is the amount of funds Bally receives? (Ignore any other fees or expenses.) A. $31,200,000 B. $30,600,000 C. $30,240,000 D. $29,280,000 E. $28,120,000

Q: 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%

Q: Day-to-day trading practices of securities firms currently may be regulated by which of the following? I. FINRA II. SEC III. Federal Reserve IV. SIPC A. I only B. II only C. I and II only D. I and III only E. II and IV only

Q: 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.

Q: You buy euros in New York from Deutsche Bank and simultaneously sell them in London to Barclays for a gain. This is an example of A. position trading. B. program trading. C. risk arbitrage. D. pure arbitrage. E. hedging.

Q: 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.

Q: 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

Q: 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 principal for the issuer. D. the investment banker acts only as a distribution agent. E. the issue can only be privately placed.

Q: Diversified full-line securities firms engage in all but which 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

Q: Brokerage commission income and stock market valuations tend to move inversely in most years, including in 2010.

Q: Angel venture capitalists have invested more in startup firms than institutional venture capital firms.

Q: The Securities Investor Protection Corporation protects investors against losses due to unfavorable market moves of up to $500,000.

Q: Profitability at investment banking firms has been very stable each year since 2001.

Q: Although an investor can write checks on a cash management account held with a broker, regulations prevent the use of ATMs or debit cards on these accounts.

Q: If you buy 100 shares of IBM stock in anticipation that earnings will increase by more than anticipated, you are engaging in what is termed a risky arbitrage.

Q: Program trading is the simultaneous buying and selling of at least 15 stocks worth a total of $1 million or more.

Q: Cash management accounts offered by a securities firm allow investors to write checks on funds invested in money market securities.

Q: A stock broker acts as a principal on behalf of the customer.

Q: An example of a pure arbitrage strategy is to simultaneously buy and sell the same security in two different markets at different prices.

Q: Buying large blocks of securities and holding them until the price rises sufficiently to warrant a sale is an example of pure arbitrage.

Q: 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.

Q: In a best efforts offering, the investment banker acts as an agent for the issuer rather than as a principal.

Q: The process of creating a secondary market for securities or contracts is termed brokerage.