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24 Cards in this Set

  • Front
  • Back
What is the primary market?
financial markets dealing with financial claims that are newly issued
What are investment bankers?
work with issuers to distribute newly issued securities
What is underwriting>
the function of buying the securities from the issuer
What is a firm commitment?
firm agrees to buy securities from the issuer at a set price
What is a best efforts arrangement?
investment banking firm agrees only to use its expertise to sell the securities, it does not buy the entire issue from the issuer
What is the gross spread or the underwriter discount?
difference between the price paid to the issuer and the price at which the investment bank reoffers the security to the public; constitutes the fee
What are initial public offerings (IPOs)?
common stock offerings issued by companies that had not previously issued common stock to the public- gross spread is usually higher for IPOs because of risk
What does a synidicate of firms do in the underwriting process?
because of risk of one firm underwriting and losing a significant portion of its capital, more investment banks join in the underwriting process
What is a selling group?
group includes underwriting syndicate plus other firms; increases potential investor base; provides input on amount of interest
Among whom is the gross spread divided?
lead underwriter, members of the underwriting syndicate, and members of the selling group
What is a registration statement?
must be filed with SEC by the issuer of a security; includes information in nature of the business, key provisions/features of the security, nature of the investment risks, background of management
What are the two parts of a registration statement?
1. a prospectus- shown to public
2. contains supplemental information, not distributed to the public, has to be requested
What is due diligence?
obligation of underwriter, must verify the registration statement
What is the waiting period?
time interval between the initial filing of the registration statement and the time the registration statement becomes effective
What is a red herring?
before prospectus becomes effective, cover pages states that it is a red herring in red ink
What is the shelf-registration rule?
allows certain issuers to file a single registration document indicating they intended to sell a certain amount of securities within the next two years; sale of the security does not have to be pre-approved by the SEC; allows issuers to quickly take advantage of good markets
What are the other variations in underwriting?
1. bought deal
2. auction process for both stocks and bonds
3. rights offering for underwriting common stock
What is a bought deal?
offer is made to a potential underwriter to purchase securities with a specified interest rate and maturity; only one firm is the underwriter but it usually has other buyers lined up; allows firms to quickly take advantage of favorable market conditions
What is the auction process or competitive bidding underwriting?
issuer announces the terms of the issue, and intersted parties submit bids for the entire issue; used for public utilities and many municipal debt obligations
What is a single-price or Dutch auction?
all bidders pay the lowest winning price
What is preemptive rights offering?
corporation can issue new common stock directly to existing shareholders; ensures that investors can maintain their share of equity in the company; no underwriting services are needed
What is a standby underwriting arrangment?
issuing corporations use the services of an investment banker for the distribution of common stock that is not subscribed to; must pay a standby fee for service
What is private placement?
securities placed with a limited number of investors such as insurance companies, investment companies and pension funds; life insurance companies are the major investors; cannot advertise; prospectus is not subject to SEC review
What is Rule 144A?
rule eliminates the 2-yr holding period for privately placed securities (which in the past caused the market to be illiquid raising the cost to the issuer)