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FIN 201 Chapter 3
| Question | Answer |
|---|---|
| What does the transfer of funds to business do? | Facilitate the transfer of funds from those with funds to invest to those that need funds |
| Indirect fund transfer | Through a financial intermediary |
| Direct fund transfer | Through the purchase of securities issued by firms |
| What is the role of investment bankers? | Faciliate sales of new issues of securities in the primary market |
| What is an Initial Public Offering (IPO)? | Originating house (investment banks), makes an agreement to sell a new issue, may form a syndicate to sell the securities |
| What is underwriting? | Providing funds, writing terms, person that comes up with the money, guarantees issuing firm a specified amount of money, investment bank purchases issue for subsequent sale, underwriter bears the risk of the sale |
| Best efforts agreement | Investment bank agrees to sell the securities, no guaranteed sale, issuing firm bears the risk of the sale |
| Restructuring asks the question... | How can we change the composition of debt and equity to bring us back from the brink of bankruptcy |
| Restructuring is what kind of service | Niche |
| Bulge bracket banks | Banks with a history of taking a company public, they have the largest network, most clients, best reputation |
| What does pricing a new issue do? | Pricing new securities maximizes sale proceeds |
| Overpricing | Investment bank holds the securities in inventory for resale, inflicts losses on initial buyers |
| Underpricing | Tendency to underprice to assure a successful rate, leads to windfall gains to initial buyers |
| Preliminary prospectus (red herring) | Informs potential buyers that the securities are being registered with the SEC and may be offered for sale, detailed document concerning the company |
| Final prospectus | Includes price of the security, proceeds to the company, underwriting discount, recent financial data |
| Volatility of the Market for Initial Public Offerings | Few investors get to participate in an IPO, it can be extremely volatile, may achieve substancial returns with high risk, many IPOs eventually fail |
| Secondary Offering | Subsequent sale of common stock to the general public after an IPO, "secondary" or "follow on" offering, problem of price for additional shares is eliminated, less need for a detailed prospectus |
| Shelf registration | Securities sold as funds are needed |
| If Amazon issues additional stock through an investment bank, is this an IPO or a secondary offering? | This is a secondary offering, as Amazon has previously issues securities and is currently a public company |
| Private Placement | Nonpublic sale of securities to a financial institution (venture capital firms or mutual funds), reduces selling costs, features can be tailor-made for both parties |
| What are Direct Listing and Special Purpose Acquisition Companies (SPACs)? | Alternative ways that some companies become publicly traded |
| Direct Listing | Sale of shares from existing investors to new investors at the same time a company becomes publicly traded |
| Special Purpose Acquisition Company (SPACs) ? | Company formed for the purpose of acquiring another company so that the acquiree becomes publicly traded |
| Securities Act of 1933 and Securities Exchange Act of 1934 | Full disclosure laws, registration statement, annual report (10-K report), illegal use of inside information |
| SEC (Securities Exchange Commission) | Enforces federal security laws, will not clear the securities for sale until all material facts that may afffect the value of the securities have been disclosed |
| What does the SEC not do? | Comment on the worthiness of the securities as an investment |
| What does the SEC have the power to do? | Suspend trading |
| Securities Investor Protection Corporation (SIPC) | Federal agency that insures investors against failure by brokerage firms, however the brokerage firm may carry additional insurance |
| How much does the SIPC cover? | Up to $500,000 of an individual's securities held by a broker |
| Sarbanes-Oxley Act of 2002 purpose? | Designed to help restore investor confidence in the securities markets, create corporate responsibility and accountability, avoid fraud and conflicts of interest |
| What did the Sarbanes-Oxley Act of 2002 do? | Independecized auditors and creation of the Public Company Accounting Oversight Board, created financial disclosure and served as the firewall between investment bankers and securities analysts |
| Dodd Frank Act of 2010 purpose? | Address several factors that contributed to the Great Recession (2007-2009) |
| What did the Dodd Frank Act of 2010 create? | The Financial Stability Oversight Council, The Consumer Financial Protection Bureau, The Office of Credit Ratings |
| What are two basic methods of transferring funds to users? | Indirect transfers: Through a financial intermediary such as a bank. You lend funds to the bank, which in turn lends the funds to the ultimate borrower. Direct transfer: The direct sale of securities to investors in the primary market |
Created by:
lavenderdreamy
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