Investment Banking Final Flashcards

Front 1

Looking at the leverageratios of former pure-play investment banks GS and MS in exhibit 1.4, why werethese banks able to operate at higher leverage ratios as investment bankscompared to bank holding companies?

Back 1

Bank Holding Companies are required to comply with the SEC and the FED, whereas the pure-play Investment Banks only had to comply with the SEC. Also the pure-play Investment banks didn't take deposits and therefore were able to operate with a higher leverage.

Front 2

U.S. companies currentlyreport their financials based on U.S. GAAP rules. Many companies in Europereport according to IFRS rules. There has been a movement for all companies toshift to an IFRS basis globally. When this occurs what may happen to theleverage ratios of U.S. banks?

Back 2

Switching to IFRS will result in higher leverageratio – US banks will need to cut leverage further under current Fed’sregulation.

Front 3

Why might a universal bankbe better able to compete against a pure play investment bank for M&A and otherinvestment banking engagements?

Back 3

Universal banks have more stable and havecountercyclical business cycles and are better able to compete internationally. Also international banks have significant lending capability and can use it as a platform to capture greater IB marketshare.

Front 4

Who within the investmentbank is responsible for balancing these competing interests (issuers &investors)?

Back 4

The Capital Markets Groups balance competing interests between issuers and investors by working with both investment bankers and traders tonegotiate prices for debt and equity offerings.

Front 5

What is a key considerationin determining the cost and other parameters of a corporate debt offering, andwhy is it important?

Back 5

The impact debt offerings have on the company’scredit ratings are very important as credit ratings determine borrowing costs,which indirectly impacts the leverage of the company.

Front 6

Why might an investmentbank place higher priority on sell-side m&a engagements over buy-sideengagements?

Back 6

Sell-side M&Aengagements have a higher probability of completion. As fees a typically paidto M&A bankers only upon successful completion of a transaction, there isgreater incentive alignment with sell-side engagements compared to thebuy-side.

Front 7

Many investment banks have a principal investmentgroup that invests directly in public and private companies. What conflicts ofinterest might arise from operating this type of business?

Back 7

The principal investment groupmay compete with a private equity group for an acquistion. This is a conflict of interest because theinvestment bank reaps fees from underwriting and M&A advisory from privateequity firms but can also reap rewards from their own principal investmentgroup.

Front 8

What conflicts might exist between theproprietary trading division and the rest of the investment bank?

Back 8

Theycan use internal information to make trades, which is prohibited.

Front 9

What conflicts might exist as a resultof having both an asset management business and a private wealth managementbusiness?

Back 9

PWMclients may be encouraged to invest in funds managed by the own bank’s AM.

Front 10

Following the 1929 stockmarket crash, Congress passed a series of Acts to regulate the securitiesindustries. Name 4 of the Acts and briefly describe their purpose.

Back 10

Glass-Steagall Act 1933 - separated commercial and investment banks, created the FederalDeposit Insurance Corporation (FDIC) which insured depositors assets in the eventof a bank default.

Securities Exchange Act of1934 - supervision of new security offerings,ongoing reporting requirements for these offerings, and the conduct ofexchanges.

Public Utility HoldingCompany Act 1935 - allowed the SEC tosupervise the relationship between utility holding companies and investmentbanks.

The Chandler Act 1938 - added chapter X bankruptcies to the National Bankruptcy Act. Beforethis act, corporate bankruptcies had limited government involvement and werelargely run by private companies.

Front 11

A goal of many parts ofU.S. regulatory legislation has been to eliminate or minimize conflicts ofinterest between issuers, investment banks, and investors. Provide examples ofconflicts of interest in the U.S. investment banking industry and thecorresponding regulations that attempted to resolve those issues.

Back 11

fraudulent information about sale of securitiesbetween investment banks and issuers and investors, Securities Act of 1933required information be released about securities offered for public sale

Banks were using bankruptcyaccesses to rake in excessive profits, resolved by the Chandler Act in 1938

Front 12

Disclosure of informationto investors is another recurring theme in U.S. regulation of the securitiesindustry. Provide examples of disclosure required by U.S. regulations.

Back 12

Companies must give regulators and prospectiveinvestors through a filing with the SEC called the Registration Statement.Companies are also required to provide investors with a prospectus, whichcontains certain elements of the information included in the registrationstatement

Front 13

What is the role of U.S.states in regulating the investment banks?

Back 13

The states have effectively been removed from securitiesregulation of investment banks, except for antifraud matters. Now states onlyregulate antifraud matters.

Front 14

What types of U.S.securities offerings do not need to be registered with the SEC?

Back 14

-Private offerings to a limited number ofpersons or institutions

-offerings of limited size

-securities of municipal, state, and federalgovernments

Front 15

What is a red herring?

Back 15

A preliminary registration statement that mustbe filed with the SEC describing a new issue stock.

Front 16

Widgets inc. is a publiclytraded company with approximately $300mil in market capitalization. The companyfiled a registration statement for a follow-on offering in May of this year,but began selectively speaking to investors about the issue in March. Itsoffering is now being delayed by the SEC. What is the likely reason for thedelay?

Back 16

Widgets Inc. might have been “gun-jumping” byspeaking to select investors in the pre-filing period and the subsequent delaymight be an SEC-imposed “cooling off” period following the violations.

Front 17

What are the risk factorsin a prospectus. Why are they important to the issuer and to the investor?

Back 17

They’re important for the investor to understandthe risks they might be facing in investing in the security and the company.The issuers use the section to specify risks and provide transparency topotential investors.

Risks include:

risks related to a borrower’s default

-risks inherent in investing

-risks related to compliance and regulatoryrequirements

Front 18

What is the significance ofthe Gramm-Leach-Bliley Act of 1999 in relation to the securities industry?

Back 18

The Act overturned the mandatory separation ofcommercial banks and investment banks required by Glass-Steagall

Front 19

What are some major differences between theregulatory frameworks of the 4 countries covered in this chapter?

Back 19

China: Originally had 2 commissions in 1992, however they merged in 1998.

U.K.: Follow the SIB or FSA, which is the equivalent to the SEC. Also have to adhere to the EU's rules.

Japan: Very similar to the U.S. since we helped with the restructuring after WW2.

Front 20

What type of securitiesofferings do not need to be registered with the SEC?

Back 20

The resale of restricted securities, including amajority of debt offerings and a large portion of convertible offerings in theUS, to Qualified Institutional Buyers (QIBs) are exempt.

Front 21

List the three types ofbank participants in an underwriting syndicate and their core responsibilities,in order of compensation received, from high to low.

Back 21

Lead bookrunners of the transaction have the responsibility for determining themarketing method and the pricing for the transaction and therefore, receive thehighest underwriting allocation

Comanagers provide minor input to thebookrunners on marketing a pricing issues, but don’t control this process, andhave less risk and less work to do, and so receive lower compensation.

There is also the Selling Group for theofferings, who don’t take any financial risk and receive even lowercompensation

Front 22

What are league tables andwhy are league tables important in investment banking?

Back 22

League tables” is the way that the investment banking industry keeps track ofunderwriting participations by all banks and this becomes a basis for comparingbanks’ underwriting capabilities

Front 23

Describe the function ofthe equity capital markets group, including the two major divisions theydirectly work with and the two types of clients they indirectly work with.

Back 23

The Equity Capital Markets Groups help privatecompanies determine if an IPO of stock is a logical decision based on ananalysis of benefits and disadvantages. The bank then must determine if thereis sufficient investor demand to purchase those new securities, and then thecompany will proceed to determine the expected value of the firm based oncommon valuation methodologies: public comps, DCF

The equity capital markets group would work withthe investment banking division as well asthe sales & trading divisions, and would indirectly work with institutional investors as well as the issuers.

Front 24

Describe the unique processutilized by Google in its IPO, including its intended advantages and potentialdisadvantages.

Back 24

Google was determined to IPO using a DutchAuction, in which potential investors weigh in with bids, listing thenumber of shares they want and how much they are willing to pay for thoseshares. Bids are then ranked with the highest price at the top. And then, goingfrom the highest price down, the market price is established in which all theshares that can be sold will be sold at the lowest price offered. The advantagesof a Dutch auction are that it guarantees the greatest distribution to retailinvestors. The Disadvantages would include the alienation of large institutionalclients.

Front 25

What is a shelfregistration statement and what securities can be included in it?

Back 25

A shelf registration is typically filed with theSEC at some point after completing an IPO; this allows a company to file oneregistration statement that covers multiple issues of different types ofsecurities; equity offerings, debt, andconvertible securities

Front 26

Why might a youngerhigh-tech company select equity over debt when raising capital?

Back 26

A high-tech company, that has a less certainfuture cash flow, will prefer an equity offering since there are no regularpayments required in raising equity capital

A young company that does not have the samecredit reputation as older, more established companies, will have to pay morefor debt financing

Front 27

A BBB-/Baa3 rated companyis looking at acquiring a smaller (but sizeable) competitor. Discussconsiderations the company should take into account when deciding whether tofund the acquisition with new debt, equity, or convertible securities.

Back 27

The company, when considering funding theacquisition with debt, will need to determine how much debt it is capable oftaking on, since an increase in debt may cause the debt offering rating to gobelow BBB-/Baa3 and thus become noninvestment grade

If the company is considering an equity funding,then it must consider the dilutive effects of the equity offering, and thus theloss in shareholder value for each shareholder

If the company would like to fund theacquisition with convertible securities, it must determine whether it would bebetter to issue optionally converting convertibles or mandatorily convertingconvertibles

Front 28

Why did the SEC delaydeclaring Google’s IPO registration effective?

Back 28

Google had violated “quiet-period” rules. This riled the SEC, causing the delay indeclaring the IPO’s registration effective

Front 29

Provide reasons that aninvestment bank might give to support their advice that a private companyshould “go public.”

Back 29

Access to Public Funding

Enhanced profile andmarketing benefits

public companies receive more media attention generally

Front 30

List six characteristics ofcompanies that are good targets for an equity issuance.

Back 30

- Strong stock performance or supportive equity research.

- Large insider holdings or illiquid trading.

- Overly leveraged capital structure.

- Strategic events imminent: financing an acquisition or large capitalexpenditure.

- Sum of Parts analysis (Carve-out, spin off, tracking stock) indicateshidden value.

- Investor focus, i.e. a Road Show focuses investors on misunderstoodvalue and brings in additional equity research.

Front 31

How does a negotiated (bestefforts) transaction differ from a “bought deal”?

Back 31

A negotiated/best efforts transaction differs toa “bought deal” in that the issuer will bear the price risk; whereas in theunderwriting in a bought deal, the investment bank bears the price risk.

Front 32

What are some methods usedby investment banks to help equity issuers mitigate price risk during themarketing process?

Back 32

an acceleratedoffering with a shorter road show period of one or two days

a block trade, in which the investmentbank buys the securities without a road show and bears full price risk

Front 33

Explain what a green shoe is.

Back 33

Green Shoe is an overallotment option that givesan investment bank the right to sell short a number of securities equal to15% of an offering the bank is underwriting for a corporate client.

Front 34

When a company has agreedto a green shoe, who does the underwriter buy shares from if the share pricedrops? Who do they buy shares from if the share price increases?

Back 34

If the share price drops, then the investmentbank will buy shares in the market at the prevailing market price in order togenerate demand and support the stock. If the share price increases, then thebank will buy shares from the issuer at the offering price.

Front 35

What is the tradeoff forhaving a stabilizing green shoe option in a common equity offering?

Back 35

Pro: Can help control the stock price

Con: company must accept the negative earnings pershare consequences of issuing more shares

Front 36

Provide definitions forstrategic buyers and financial buyers in a prospective M&A transaction.

Back 36

Strategic Buyers in an M&A deal aim topurchase another company in the hopes of generating synergies in the context ofreduced costs or increased revenues. Financial buyers are those firms whosebusiness model is to buy, to develop, and subsequently to sell businesses.

Front 37

Why have strategic buyerstraditionally been able to outbid financial buyers in auctions?

Back 37

Strategic buyers traditionally outbid financialbuyers in auctions because of their willingness to pay a higher price than thecurrent market price for a public company due to the potential for bothexpected synergies (cost-cutting and revenue generating) and a control premium.

Front 38

Why are revenue synergiestypically given less weight than cost synergies when evaluating the combinationbenefits of a transaction?

Back 38

Revenue synergies should be discounted frommanagement’s projections since they are very difficult to capture, thoughcost-synergies are generally easier to forecast since cost-structures typicallydo not regularly and drastically change.

Front 39

In the United States, if anM&A transaction is relatively large within its industry, what is the nameof the regulatory filing that is probably necessary before the transaction canbe consummated? Which agency is it filed with? How long is the waiting periodafter a filing is made? What is the name of the European regulator that may berelevant in an M&A transaction?

Back 39

Hartt Scott Rodine. Filed with the FTC and DOJ to make sure that the transaction doesn't create a monopoly. 30 day waiting period. European commission.

Front 40

Assume an acquiringcompany’s P/E is 15x and the target company’s P/E is 11x. Is the acquirer moreor less likely to use stock as the acquisition currency? Why?

Back 40

The acquirer is likely to use stock as theacquisition currency because the acquirer has topay less for each dollar of earnings than the market values its own earnings. Hence, the acquirer will issue proportionally less shares in thetransaction by doing an equity finance.

Front 41

What is a potential risk of trying to complete a stock-based acquisitionduring periods of high market volatility?

Back 41

High market volatility can change the economic value of the acquiring stock.

Front 42

Assume an investment bankhas provided a fairness opinion on a proposed M&A transaction. Does thismean the board should go ahead and approve the transaction?

Back 42

The board should not approve the transaction immediately since the fairness opinion is only a financial recommendation from the investment bank.

Front 43

Why might a board want toinclude a “go-shop” provision in the merger/purchase agreement?

Back 43

A “go-shop provision” would allow a targetcompany to “shop” its current deal with other prospective buyers, whereas a“no-shop” provision will disallow this. A board will opt for a go-shopprovision because it will encourage other potential buyers, who may becompetitors of the acquiring company, to be willing to pay more for the targetcompany after seeing the viability of the company and the deal.

Front 44

When is a break-up feepaid? What is the typical fee charged as a percent of equity value?

Back 44

A break-up fee is paid if a transaction is notcompleted because a target company walks away from the transaction after aMerger Agreement or Stock Purchase Agreement is signed. A reverse breakup feeis paid if the acquiring company walks away from a transaction after signingthe agreement. These fees are usually set at 2-4% of the equity value of the target firm.

Front 45

Of the various methods by which a corporate subsidiary can be separatedfrom the parent company in the public markets (IPO, carve-out, spin-off,split-off, and tracking stock), which ones offer the subsidiary the most andleast independence?

Back 45

IPO, Spin off, and split off give the most independence to the subsidiary. Carve out and tracking stock offer give the least amount of independacne since they are still controlled by the parent.

Front 46

List the four principalalternative methods for establishing value in an M&A transaction.

Back 46

preemptive

targeted solicitation

controlled/limited auction

public auction

Front 47

Of the major valuationmethods, which one(s) are based on relative values? on intrinsic values? onability to pay?

Back 47

comparable transaction analysis and comparable company analysis value based on relative value. DCF is based on intrinsic value, and LBO is based upon ability to pay.

Front 48

when is comparable transaction better to use?

Back 48

for M&A transaction since it gives you the normal premium paid

Front 49

when is comparable company analysis better to use?

Back 49

for IPOS

Front 50

Which valuation methodtends to show the lowest valuation range? Why?

Back 50

The LBO analysis valuation method tends to showthe lowest valuation range because it provides a “floor value” for a companysince it represents the price that a financial buyer would be willing to pay,based on achievement of their required IRR. Strategic buyers will generally usethe other valuation methods because they are able to pay more than thefinancial buyers since they can take advantages of synergies with their owncompany.

Front 51

When might an investment bank declineparticipation in an underwriting and why?

Back 51

An investment bank may decline to participate inunderwriting when the commitments committee assign to determine the risk decidethe firm will lose money or expose itself to significant risk for the underwriting.

Front 52

How do professionals in sales, trading andresearch work together?

Back 52

Research helps traders gain knowledge andanalysis of securities they are trading. Sales professionals bring investing orhedging ideas as well as pricing to clients. Salespeople help both clients andtraders create profits.

Front 53

Explain traders’ market-making function.

Back 53

Market making is the client-focused tradingactivities of large investment banks. It means that the bank will quote aclient a bid price or an offer price on securities or derivatives at any time.Market making traders desire to capture bid-ask spread, difference between bidprice and offer price in those transactions.

Front 54

Why would a prospective issuer prefer to hire asunderwriter an investment bank that has traders already active in its security?

Back 54

Issuers prefer traders active in its securitybecause this can lead to more accurate pricing and higher trading-basedrevenue.

Front 55

FICC is one of the main Divisions in anInvestment Bank. What does FICC stand for? Other than during 2007 and 2008, howdoes this division typically rank from a profitability point of view, comparedto other Divisions? What happened during these two years, and which part of theFICC Division was most responsible for this outcome?

Back 55

FICC stands for fixed income, currency andcommodities. It historically had been the most profitable division in mostinvestment banks. Because the FICC division handles collateralized bondobligations (CBO) and collateralized loan obligations (CLO), it sufferedmassive losses during the 2007 credit crisis. The risk in many CDOs inMortgage-backed securities was underestimated and the result was heavy losseswhen the real estate bubble popped. These were part of the structured creditbusiness.

Front 56

Which stock would likely have a lower rebate and why: a stock whoseissuer has a large amount of convertible securities outstanding, or a stockwhose issuer has no convertible securities and has no significant share-movingnews in the near-term?

Back 56

The stock whose issuer has large amount ofconvertible securities outstanding will have lower rebate because this stockwould most likely have more demand than the stock with no convertiblesecurities nor share-moving news. As demand increases, the rebate lowers.

Front 57

How were senior tranches of a CDO able to obtaininvestment-grade credit ratings when some of the underlying assets werenon-investment-grade?

Back 57

Many senior tranches of CDO were able to obtaininvestment-grade ratings because they were combined with higher grade mortgages.

Front 58

Adomestic airline based in the United States has placed a large $10 billionorder for new airplanes with French aircraft manufacturer Airbus. Delivery isscheduled in 4 years. Payments are staggered based on a percentage ofcompletion rate. The U.S. airline believes the Euro will appreciate against theDollar during this time frame. How can the U.S. airline hedge currency riskrelated to this purchase with an investment bank?

Back 58

FX Future contract; protects value ofcontract increases if Euro appreciates against dollar.

Front 59

What does VaR stand for? What is its definitionand why is it important to investment banks? What are some of the criticisms ofVaR?

Back 59

Value at risk; represents thepotential loss in value due to market movements. Criticisms of VaR include that it gives a false sense of security and creates opportunities to take excessive risk for positions.

Front 60

What is the difference between asset management(AM) and wealth management (WM)?

Back 60

Asset management is the professional managementof funds for individuals, families and institutions. Wealth management advisorsdo not manage the funds, which are the duty of AM, rather they help and giveadvice on the type of investments clients should make. Thus, there could beconflict of interest if advisors pick products from his or her own bank.

Front 61

Why would a wealth manager choose to allocatesome of a client’s asset to another bank?

Back 61

Wealth managers may choose products from anotherbank if they deem that bank’s products to be the best in terms of returns andrisk to the wealth manager’s own bank.

Front 62

How are the different functions of the sell-sideversus the buy-side manifested through their fee structures?

Back 62

Sell side research is research provided toinvesting clients of the firm while buy side is to prop traders and assetmanagers. Sell-side research is paid through soft dollar compensation which ismoney redirected to research department from investor commissions.

Front 63

What drove the need to separate research andinvestment banking?

Back 63

The potential for conflict of interest and nonobjective research is what led to separation of investmentbanking and research.

Front 64

How have the U.S. enforcement actions againstsell-side research in 2003 heightened the issue of declining research revenues?

Back 64

Government regulations have made it thatresearch analysts’ compensation cannot be based on the revenue of theinvestment banking division, so there is more payment stability.

Front 65

What are the objectives of Regulation FD? Whatare the concerns about this U.S.-based regulation?

Back 65

The objectives of Regulation Full Disclosurewere to prevent executives from selectively disclosing material informationthat could affect a company’s share price. However, concerns are thatbecause companies must be more careful in disclosing information to analystsand investors, less information is distributed in less timely way.

Front 66

Compare the different rolesprovided to the investor community by credit analysts and sell-side researchanalysts.

Back 66

Credit analyst: assign ratings to company’s debt, ratings are usedby investors, banks and governments as an input into their decisions.Issuer pays for this rating.

Sell side research analyst: provide research to investing clients of thefirm.They are basically doing research to help aclient determine if they should invest in a security.

Front 67

What is the differencebetween business risk and financial risk?

Back 67

Financial risk: is the risk that a business’scash flows are not enough to pay creditors andfulfill other financial responsibilities.

Business risk:Business risk refers to thechance a business's cash flows are not enough to cover its operating expenseslike cost of goods sold, rent and wages

Front 68

What precipitated thedecline in CDO values during the 2007-2008 credit crisis?

Back 68

Monoline insurers provided guarantees to CDOs that were backed by subprimemortgages. As the mortgages declined in value in 2007-2008 the potential futurepayment obligations of the monoline insurers increased dramatically whichresulted in credit ratings agencies downgrading the credit ratings of themonolines. This in turn caused the ratings agencies to downgrade the CDOsguaranteed by the monolines.

Front 69

What are the majorcriticisms directed at Moody’s, Standard & Poor’s and Fitch?

Back 69

Ratings agencies have been criticized for theirrole in rating mortgage backed securities higher than they should have leadingup to the credit crisis. They are also criticized for not downgrading themquickly enough.

Front 70

In 2001 the NYSE switchedfrom a fractional pricing system to a decimal pricing system. Explain how thismight encourage front-running by traders?

Back 70

The decimal system couldmake "front running" easier because under the old system traderswould have to pay 1/16 or 6.25 cents a share to "step in front." Nowthey can do it for only a penny or two .

Front 71

Why might OTC Derivativesbe considered more risky than exchange traded derivatives?

Back 71

OTC derivatives are not required to be cleared through regulated exchanges. Exchange traded derivatives are more regulatedand guaranteed by the exchange.

Front 72

How is derivativessettlement different from securities settlement?

Back 72

Derivatives often remain outstanding for monthsor years while securities are generally cleared and settled in 3 days. This exposes to buyer and seller of a derivative to financial risk for an extended period of time.

Front 73

What are the benefits ofissuing and investing in Eurobonds?

Back 73

Eurobonds areattractive because they are largely unregulated and can, at times, offer higheryields. Interest income from the bonds is exempt fromwithholding tax and the bonds are generally not registered w/ any regulatory

Front 74

Why are most corporateEurobond issuers large multinational corporations?

Back 74

Because it is a lot easier for multinational corporationsto issue debt, and not have it tied to the regulations of the parent country.

Front 75

Discuss why the Japanesegovernment’s guarantee to Ripplewood as part of its buyout of Long termCredit Bank is similar to granting Ripplewood a put option on the bank’sassets.

Back 75

The Japanese government agreed to purchase any LTCB assets that fell by 20% or more post acquisition. This is similar to a put option because Ripplewood could sell back the assets (should they drop 20% in value) at an agreed-upon price back to the Japanese government, which is essentially a put option.

Front 76

Why did China institute anA-share B-share system? How has regulator easing benefited QFIIs?

Back 76

To ensures that the largest market is onlyutilized by Chinese residents, corporations, & QFIIs. Regulatory easing allowed the QFII program to participate in the Chinese market through A shares.

Front 77

In a comparabletransactions analysis, what additional considerations might an investmentbanker factor in when valuing an emerging market company?

Back 77

The country that the company is in. This means political risk, economic risk, and financial risk. All of these factors can affect the weightedaverage cost of capital.

Front 78

After an initial hedge is in place, what dohedge fund investors in convertible bonds do with shares of the underlyingstock when the stock price increases or decreases?

Back 78

When the stock price increases they short more shares. When the stock price decreases they buy more shares in order to decrease their current short position.

Front 79

True or false: Convertible arbitrage hedge fundsinvest in convertible bonds because the fund managers have a bullish view onthe company’s stock. Explain your answer.

Back 79

False. Convertiblearbitrageurs invest in convertible bonds to monetize the volatility of theunderlying stock, so they don’t necessarily have a bullish view on it.

Front 80

Discuss whether you feel the SEC’s temporary banon short-selling financial stocks in 2008 during the financial crisis unfairlypunished convertible arbitrage funds.

Back 80

During the 2008 financial crisis, some HFs wereallegedly spreading negative rumors about financial institutions like LehmanBrothers, which put a lot of downward pressure on those companies’ stock price.These HFs were then able to make huge trading profits from their shortpositions in those stocks. SEC was trying to fix that by temporarily banningshort-selling financial stocks, however some HF's were punished for the mistakes of others.

Front 81

If companies A and B are identical in everyrespect except B has higher stock price volatility, which company would likelyachieve better convertible pricing? Assuming convertibles issued by A and Bhave the same terms except for conversion price, would the company you selectedhave a higher or lower conversion price?

Back 81

B will have better convertible pricing becauseit has higher stock price volatility. Higher conversion price for B.

Front 82

Suppose you are a current shareholder in acompany that is contemplating capital raising alternatives. Assuming thetransaction would have no negative credit repercussions and you want minimalEPS dilution, rank the following types of convertibles from least potential fordilution to most potential for dilution: coupon-paying convertible, mandatoryconvertible, zero coupon convertible.

Back 82

1. Zero Coupon Convertible

2. Coupon paying convertible

3. Mandatory convertible

Front 83

A U.S.-based BBB-rated company is looking tomake a large acquisition. Management believes synergies from the acquisitionwill create new market opportunities. Unfortunately, these new opportunitieswill take a few years to realize, and until then, benefits will not be fullyreflected in the company’s stock price. If the company has rating agencyconcerns and wants tax deductions from interest payments, what type of securityis this company likely to issue in support of its acquisition and why?

Back 83

Unit-structure mandatory convertibles:

Tax deduction oninterest payments

Front 84

Why was the Nikkei Put Warrant program soprofitable for Goldman Sachs?

Back 84

The Nikkei Warrant Put program was so profitablefor GS because it had accurately estimated that future volatility of the Nikkei225 Index would be higher during the delta hedging period than the impliedvolatility of the Japanese stock market at the time of the purchase of theNikkei put warrants

Front 85

What are the coredifferences between Investment Banking (IB) and Sales and Trading career paths?

Back 85

You can move up the ranks faster in Sales and Trading compared to IB which is a fixed time frame. Hours are usually shorter for S&T employees, and usually they are paid less. At least at first.

Front 86

Describe what a ChineseWall is and which U.S. regulator would be concerned with issues involvingthe wall.

Back 86

A Chinese Wall is the physical and legalseparation, as well as restricted communication, between the proprietarytraders and the client-related traders in a firm because of potential conflictsof interests. The SEC would be concerned with these types of issues.

Front 87

What advancement in themortgage market set the foundation for the subprime crisis and why?

Back 87

Traditionally commercial banks held mortgages on their balance sheets, but then they began to sell these securities in the capital market. By doing so they would transfer the risk to someone else, and this gave them little incentive to adhere to strict mortgage standards.

Front 88

Describe a Credit DefaultSwap (CDS). What are the regulators trying to do to mitigate risk in the CDSmarket?

Back 88

A Credit Default Swap is a derivative contractbetween three parties that is designed to spread risk and reduce exposure to creditevents such as a default or bankruptcy. Regulators are requiring that parties entering into the swap fully disclose all information that is relevant.

Front 89

Under what scenarios willthe SIV market arbitrage model fail to work?

Back 89

The SIV market arbitrage model fails to workwhen faced with high liquidity and interest rate risk.

Front 90

Why were U.S. investmentbanks allowed to operate at higher leverage ratios compared to commercialbanks?

Back 90

US investment banks were allowed to operate athigher leverage ratios compared to commercial banks because higher leverageenhances their return on equity.

Front 91

How does the phrase“perception is reality” apply to Bear Stearns?

Back 91

Bear’s ultimate undoing had been due to theperception that it was facing a cash crunch. This perception caused a cash crunch, and so ‘perception is reality’.

Front 92

How do Asian andpetrodollar investors fit into the genesis of the financial crisis during2007-2008? Structure your answer around the themes of easy credit, excessliquidity and cheap debt.

Back 92

Asian and petrodollar investors’ profitscontinued to grow during mid-2007, their assets possibly reaching the size ofassets under management by insurance companies. This excess liquidity mightfoster asset price inflation through large purchases of US Treasuries andcorporate bonds, lowering US long-term interest rates (easy credit). Althoughthis may have helped create low-cost capital (cheap debt), the easy moneyconditions led to rising real estate prices and then to the subsequent mortgagecrisis.

Front 93

Discuss how CDS can be usedfor hedging and speculative purposes.

Back 93

For protection buyers, a CDS resembles aninsurance policy, so it can be used to hedge against a default or bankruptcy by the reference entity.