Investment Banking Exam
Preparation Guide
Course Introduction
Investment Banking explores the fundamental concepts, practices, and institutions within the world of investment banking. The course covers key areas such as mergers and acquisitions (M&A), initial public offerings (IPOs), debt and equity underwriting, financial modeling, and valuation techniques. Students will analyze the roles investment banks play in capital markets, advisory services, and risk management, gaining insights into deal structuring, regulatory frameworks, and industry standards. Real-world case studies illustrate how investment bankers facilitate capital raising and strategic transactions, preparing students for potential careers in finance, corporate strategy, or advisory roles.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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2334 Verified Questions
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Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) Interest rates can be accurately described as the rental price of money.
A)True
B)False
Answer: True
Q2) If you are planning a vacation to Europe,do you prefer a strong dollar or weak dollar relative to the euro? Why?
Answer: One would prefer strong dollar as he would like to get more Euros per dollar for the trip so that he can spend more on his trip.Strong dollar will yield more euros per dollar and number of euros per dollar will increase
Q3) A rising stock market index due to higher share prices
A) increases people's wealth and as a result may increase their willingness to spend. B) increases the amount of funds that business firms can raise by selling newly issued stock.
C) decreases the amount of funds that business firms can raise by selling newly issued stock.
D) both A and B of the above.
Answer: D
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Bonds that are sold in a foreign country and are denominated in that country's currency are known as
A) foreign bonds.
B) Eurobonds.
C) Eurocurrencies.
D) Eurodollars.
Answer: A
Q2) Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks,thereby reducing losses due to A) moral hazard.
B) adverse selection.
C) bad luck.
D) financial panics.
Answer: B
Q3) A pension fund is not a contractual savings institution.
A)True
B)False
Answer: False
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Page 4
Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) The process of calculating what dollars received in the future are worth today is called
A) calculating the yield to maturity.
B) discounting the future.
C) compounding the future.
D) compounding the present.
Answer: B
Q2) In which of the following situations would you prefer to be making a loan?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: B
Q3) The real interest rate is actually the ex ante real interest rate because it is adjusted for actual changes in the price level.
A)True
B)False
Answer: False
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) An increase in an asset's expected return relative to that of an alternative asset,holding everything else unchanged,raises the quantity demanded of the asset.
A)True
B)False
Q2) In Figure 4.4,the most likely cause of the increase in the equilibrium interest rate from i? to i? is a(n)________ in the ________.
A) increase; expected inflation rate
B) decrease; expected inflation rate
C) increase; government budget deficit
D) decrease; government budget deficit
Q3) When bonds become less widely traded,and as a consequence the market becomes less liquid,the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls
C) left; falls
D) left; rises
Q4) Explain how the price of gold should be positively related to expected inflation.
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6
Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) If the expected path of one-year interest rates over the next five years is 1 percent,2 percent,3 percent,4 percent,and 5 percent,then the pure expectations theory predicts that the bond with the highest interest rate today is the one with a maturity of A) one year. B) two years.
C) three years. D) four years.
E) five years.
Q2) If a corporation's earnings rise,then the default risk on its bonds will ________ and the equilibrium interest rate on these bonds will ________. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase
Q3) The market segmentation theory is able to explain why interest rates on bonds of different maturities move together over time.
A)True
B)False
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) The efficient market hypothesis applies to
A) both the stock market and the foreign exchange market.
B) the stock market but not the foreign exchange market.
C) the foreign exchange market but not the stock market.
D) neither the stock market nor the foreign exchange market.
Q2) If the security markets are truly efficient,there is no need to pay for help selecting securities.
A)True
B)False
Q3) Mean reversion refers to the observation that
A) stock prices overact to news announcements.
B) stocks prices are more volatile than fluctuations in their fundamental value would predict.
C) stocks with low returns are likely to have high returns in the future.
D) stocks with low returns are likely to have even lower returns in the future.
Q4) Technical analysis is a popular technique used to predict stock prices by studying past stock price data and searching for patterns such as trends and regular cycles.
A)True
B)False
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) Bad firms
A) do not have an incentive to make themselves look good.
B) will slant the information they are required to transmit to the public.
C) both A and B of the above.
D) neither A nor B of the above.
Q2) What is the principal-agent problem?
Q3) An audit certifies that
A) a firm's loans will be repaid.
B) a firm's securities are safe investments.
C) a firm abides by standard accounting principles.
D) the information reported in a firm's accounting statements is correct.
Q4) Economies of scale means that the percentage return on a financial transaction rises as the size of the transaction rises.
A)True
B)False
Q5) The problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance.
A)True
B)False
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) The Internet stock market bubble of the late 1990s led to one of the worst financial crises in U.S.history.Banks lost billions of dollars as Internet companies went bankrupt.
A)True
B)False
Q2) Explain the relationship between agency theory and a financial crisis.
Q3) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.
A)True
B)False
Q4) Stage Three of a financial crisis in an advanced economy features
A) a general increase in inflation.
B) debt deflation.
C) an increase in general price levels.
D) a full-fledged financial crisis.
Q5) What is the problem with government safety nets,such as deposit insurance,during the formative stages of a financial crisis?
Q6) Describe how the European debt crisis evolved.
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Page 10
Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The 12 Federal Reserve banks are involved in monetary policy in which of the following ways?
A) Their directors establish the discount rate.
B) They decide which banks can obtain discount loans from the Federal Reserve Bank.
C) Their directors select one commercial banker from each bank's district to serve on the Federal Advisory Council.
D) all of the above.
Q2) Supporters of the current system of Fed independence believe that a less autonomous Fed would
A) adopt a long-run bias toward policymaking.
B) pursue overly expansionary monetary policies.
C) be more likely to create a political business cycle.
D) do only B and C of the above.
Q3) Which of the following is not an entity of the Federal Reserve System?
A) Federal Reserve banks
B) The FDIC
C) The Board of Governors
D) The Federal Advisory Council
E) Member commercial banks
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample
Questions
Q1) If the Fed uses the federal funds rate as an interest rate target,an increase in the demand for reserves will result in a(n)________ in ________.
A) increase; nonborrowed reserves
B) decrease; nonborrowed reserves
C) increase; the federal funds interest rate
D) decrease; the federal funds interest rate
Q2) What goals are continually mentioned by central bank officials when discussing the objectives of monetary policy?
A) High unemployment
B) Instability in foreign exchange markets
C) Interest-rate stability
D) All of the above
Q3) An open market transaction intended to change the level of bank reserves is a A) repurchase agreement.
B) reverse repo.
C) dynamic operation.
D) defensive operation.
Q4) Discuss how the monetary policy of the European Central Bank is similar to the U.S.How are they different?
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Chapter 11: The Money Markets
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Sample Questions
Q1) Which of the following statements about money market securities are true?
A) The interest rates on all money market instruments move very closely together over time.
B) The secondary market for Treasury bills is extensive and well developed.
C) There is no well-developed secondary market for commercial paper.
D) All of the above are true.
E) Only A and B of the above are true.
Q2) Explain how and why repurchase agreements would be used.
Q3) A negotiable certificate of deposit
A) is a term security because it has a specified maturity date.
B) is a bearer instrument, meaning whoever holds the certificate at maturity receives the principal and interest.
C) can be bought and sold until maturity.
D) all of the above.
E) only A and B of the above.
Q4) Explain why money market interest rates move so closely together over time.
Q5) Explain how the Federal Reserve can influence the federal funds interest rate.
Q6) Why would we expect rates on money market securities to move together?
Q7) How are Treasury bills sold? How do competitive and noncompetitive bids differ?
Q8) Explain why the money markets are referred to as wholesale markets.
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Chapter 12: The Bond Market
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Sample Questions
Q1) The primary reason that individuals and firms choose to borrow long-term is to
A) reduce the risk that interest rates will fall before they pay off their debt.
B) reduce the risk that interest rates will rise before they pay off their debt.
C) reduce monthly interest payments, as interest rates tend to be higher on short-term than long-term debt instruments.
D) reduce total interest payments over the life of the debt.
Q2) The Commodity Futures Modernization Act (2000)removed derivative securities,such as credit default swaps,from regulatory oversight.
A)True
B)False
Q3) What role do restrictive covenants play in bond markets?
Q4) Most of the time,the interest rate on Treasury notes and bonds is ________ that on money market securities because of ________ risk.
A) above; interest-rate
B) above; default
C) below; interest-rate
D) below; default
Q5) What is the difference between a general obligation bond and a revenue bond?
Q6) What are Treasury STRIPS?
Page 14
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Chapter 13: The Stock Market
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Sample Questions
Q1) A stock's market value will be higher the higher its expected dividend stream is,all else being equal.
A)True
B)False
Q2) In the generalized dividend valuation model,a stock's value depends only on
A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.
Q3) Which of the following is not a division of the S.E.C.?
A) The Division of Fraud Investigation
B) The Division of Corporate Finance
C) The Division of Market Regulation
D) The Division of Investment Management
E) The Division of Enforcement
Q4) The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.
A)True
B)False
Page 15
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) ________ issues participation certificates,and ________ provides federal insurance for participation certificates.
A) Freddie Mac; Freddie Mac
B) Freddie Mac; Ginnie Mae
C) Ginnie Mae; Freddie Mac
D) Ginnie Mae; Ginnie Mae
E) Freddie Mac; no one
Q2) Nearly half the funds for mortgage lending comes from mortgage pools and trusts.
A)True
B)False
Q3) Discount points (or simply points)are interest payments made at the beginning of a loan.
A)True
B)False
Q4) In 2012,mortgage loans to farms represented the largest proportion of mortgage lending in the U.S.
A)True
B)False
Q5) Explain the features of mortgage loans that are designed to reduce the likelihood of default.
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) The theory of purchasing power parity cannot fully explain exchange rate movements because
A) all goods are identical even if produced in different countries.
B) monetary policy differs across countries.
C) some goods are not traded between countries.
D) fiscal policy differs across countries.
Q2) In the long run,a rise in a country's price level (relative to the foreign price level)causes its currency to ________,while a rise in the country's relative productivity causes its currency to ________.
A) appreciate; appreciate B) appreciate; depreciate
C) depreciate; appreciate D) depreciate; depreciate
Q3) A fall in the expected future exchange rate shifts the expected return schedule for domestic deposits to the right and causes the domestic currency to depreciate.
A)True
B)False
Q4) Explain the theory of purchasing power parity.
Q5) What are some of the long-run determinants of the exchange rate?
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Chapter 16: The International Financial System
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Sample Questions
Q1) Under a managed float exchange rate regime,policymakers frequently do not want to see their currencies depreciate because it makes ________ goods more expensive for ________ consumers and contributes to inflation.
A) foreign; foreign
B) foreign; domestic
C) domestic; foreign
D) domestic; domestic
Q2) A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal ________ in its international reserves and the monetary base.
A) sale; purchase; increase B) sale; sale; decline
C) purchase; sale; increase D) purchase; purchase; decline
Q3) By the end of 2012,China had accumulated more than $3 trillion of international reserves.How did China accomplish this? Is the policy sustainable?
Q4) Briefly explain what it means to be a "reserve-currency" country.What are the advantages? Can you think of any disadvantages?
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Page 18
Chapter 17: Banking and the Management of Financial
Institutions
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Sample Questions
Q1) A bank
A) obtains funds by borrowing and by issuing liabilities.
B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities.
C) does both A and B of the above.
D) does neither A nor B of the above.
Q2) Holding all else constant,when a bank receives the funds for a deposited check,
A) cash items in process of collection fall by the amount of the check.
B) bank assets remain unchanged.
C) bank liabilities decrease by the amount of the check.
D) all of the above occur.
E) only A and B of the above occur.
Q3) Which of the following are not reported as assets on a bank's balance sheet?
A) Cash items in the process of collection
B) Borrowings
C) U.S. Treasury securities
D) Reserves
Q4) What costs do banks hope to avoid by holding excess reserves?
Q5) How did liability management change during the 1960s?
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Chapter 18: Financial Regulation
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Sample Questions
Q1) The possibility that the failure of one bank can hasten the failure of other banks is called the
A) bank run effect.
B) moral hazard effect.
C) contagion effect.
D) adverse selection effect.
Q2) Why does the safety net created by deposit insurance increase the adverse selection and moral hazard problems in banking? How do bank regulations attempt to overcome these problems?
Q3) Describe 2 of the 5 different categories of regulation found in the Dodd-Frank legislation of 2010.
Q4) When one party to a transaction has incentives to engage in activities detrimental to the other party,there exists a problem of A) moral hazard.
B) split incentives.
C) ex ante shirking.
D) precontractual opportunism.
Q5) How have bank capital requirements changed since the banking crisis of the 1980s? Explain.
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) In 1975,financial institutions developed financial derivatives that included ________.
A) adjustable-rate mortgages
B) futures contracts
C) financial engineering
D) virtual banks
Q2) A form of electronic money used on the Internet to pay for goods and services is A) e-money.
B) e-cash.
C) a smart card.
D) a virtual bank.
Q3) Major differences between the United States and Japanese banking systems include:
A) American banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot.
B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas American banks cannot.
C) bank holding companies are illegal in Japan.
D) both A and C of the above.
E) both B and C of the above.
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) What are the five benefits of mutual funds?
Q2) Which of the following is most likely to be a no-load fund?
A) Value funds
B) Hedge funds
C) Growth funds
D) Index funds
Q3) The majority of mutual fund assets are now owned by
A) individual investors.
B) institutional investors.
C) fiduciaries.
D) business organizations.
E) retirees.
Q4) Discuss the four primary classes of mutual funds available to investors.
Q5) The origins of mutual funds can be traced back to the mid to late 1800s in ________.
A) England and Scotland
B) New York City
C) Boston
D) Germany
Q6) What are two key differences between a traditional mutual fund and a hedge fund?
Page 22
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Why must insurance companies screen applicants so carefully?
Q2) The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.
A) asymmetric information
B) moral hazard
C) adverse selection
D) fraudulent behavior
Q3) A monoline insurance company is an insurance company which specialize in credit insurance alone.
A)True
B)False
Q4) Which is not a management practice for reducing the problems of adverse selection and moral hazard in insurance?
A) Deductibles
B) Restrictive provisions
C) Coinsurance
D) Reinsurance
Q5) How did AIG,a trillion-dollar insurance giant,find itself on the brink of bankruptcy in 2008?
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Chapter 22: Investment Banks, Security Brokers and
Dealers, and Venture Capital Firms
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Sample Questions
Q1) Explain how rulings by the courts and regulators have made the markets served by both commercial and investment banks more competitive.
Q2) Private placements are more common for the sale of stocks than for bonds.
A)True
B)False
Q3) What ultimately happened to Webvan,the Internet grocer that received more than $1 billion in venture financing.
Q4) To help raise the money to finance railroad expansions,J.P.Morgan's father resided in London and sold Morgan railroad securities to European investors.
A)True
B)False
Q5) By making a market in thinly traded stocks,securities dealers solve the ________ trading problem,which is of particular benefit to ________ businesses. A) synchronous; large B) synchronous; small C) nonsynchronous; large
D) nonsynchronous; small
Q6) Discuss the advantages of a private equity buyout.
Page 24
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects,banks face the problem of
A) adverse credit risk
B) adverse selection
C) moral hazard
D) conflict of interest
Q2) If a bank has a duration gap of 2 years,then a rise in interest rates from 6 percent to 9 percent will lead to
A) a rise in the market value of its net worth of 5.66 percent.
B) a rise in net interest income of 5.66 percent.
C) a fall in the market value of its net worth of 5.66 percent.
D) a fall in net interest income of 5.66 percent.
E) an unknown change.
Q3) What is the difference between income gap analysis and duration gap analysis?
Q4) Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.
A)True
B)False
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Chapter 24: Hedging with Financial Derivatives
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Q1) When a financial institution hedges the interest-rate risk for a specific asset,the hedge is called a ________.
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
Q2) Who would be most likely to buy a long stock index future?
A) A mutual fund manager who believes the market will rise
B) A mutual fund manager who believes the market will fall
C) A mutual fund manager who believes the market will be stable
D) None of the above would be likely to purchase a futures contract
Q3) The advantage of forward contracts over futures contracts is that forward contracts
A) are standardized.
B) have lower default risk.
C) are more flexible.
D) both A and B are true.
Q4) Open interest allows investors to change the interest rate on futures contracts.
A)True
B)False
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) Factors that can lead to worsening conditions in financial markets include increasing interest rates and asset price booms.
A)True
B)False
Q2) For both emerging market economies and advanced economies,Stage Two of a financial crisis is the same - a banking crisis.
A)True
B)False
Q3) In Argentina,the primary force leading to their financial crisis in 2001 was ________.
A) fiscal mismanagement on the part of the government
B) financial liberalization
C) fraud in financial markets
D) all of the above
E) only B and C of the above
Q4) Describe the differences in the evolution of the financial crises in South Korea (1997-1998)and Argentina (2001-2002).
Q5) Contrast the stages of a financial crisis between an advanced economy and an emerging market economy.
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Chapter 26: Savings Associations and Credit Unions
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Q1) The largest asset held by S&Ls is ________.
A) consumer loans
B) securities
C) mortgage loans
D) consumer savings
Q2) Credit unions' main source of funds is ________.
A) regular share accounts
B) share certificates
C) share draft accounts
D) money market accounts
Q3) Credit unions' main type of loans is ________.
A) mortgages
B) automobile
C) credit cards
D) nonresidential real estate
Q4) What factors contributed to creating the thrift crisis?
Q5) Mutual savings banks are the only financial institutions that are tax-exempt.
A)True
B)False
Q6) How has the thrift industry been transformed since FIRREA?
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Chapter 27: Finance Companies
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Sample Questions
Q1) Discuss the regulatory environment for finance companies relative to commercial banks.
Q2) Discuss the types of risk faced by finance companies.Are these risks similar to banks?
Q3) Which of the following is not an advantage of a lease financing arrangement?
A) Companies with losses can still depreciate equipment if leased from a finance company.
B) Repossession is easier in a lease-finance arrangement because the finance company already owns the equipment.
C) Finance companies are in a good position to sell a repossessed asset, especially if they are a subsidiary of the equipment manufacturer.
D) The lessee often does not have to make as large of an upfront payment, relative to a straight loan.
Q4) Describe how floor plans work in the automobile industry.Why can finance companies offer these arrangements at a lower cost than banks?
Q5) A balloon loan requires periodic payments of principle and interest.
A)True B)False
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