Investment Banking
Final Exam Questions
Course Introduction
This course provides a comprehensive introduction to the world of investment banking, exploring the essential functions, operations, and strategic roles that investment banks play in global financial markets. Topics include capital raising through equity and debt offerings, mergers and acquisitions advisory, underwriting, asset securitization, and risk management. Students will examine the regulatory environment, the impact of technological advancements, and ethical considerations within the industry, as well as analyze recent trends and landmark transactions. By the end of the course, participants will develop a foundational understanding of investment banking principles, financial modeling, and valuation techniques relevant to both corporate clients and institutional investors.
Recommended Textbook
Analysis of Investments and Mangement of Portfolios International 10th Edition by Reilly
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Chapter 1: An Overview of the Investment Process
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Q1) Refer to Exhibit 1.6.Calculate the risk premium for asset i.
A) 4.5%
B) 8.25%
C) 4.75%
D) 3.5%
E) None of the above
Answer: B
Q2) Refer to Exhibit 1.1.What was your holding period yield?
A) -10%
B) -0.8
C) 25%
D) 0.8
E) -20%
Answer: E
Q3) The risk premium is a function of the volatility of operating earnings,sales volatility and inflation.
A)True
B)False
Answer: False
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Chapter 2: The Asset Allocation Decision
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Q1) It is not a good idea to get too specific when constructing your policy statement.
A)True
B)False
Answer: False
Q2) Refer to Exhibit 2.1.What is the tax liability for a single individual with taxable income of $85,000?
A) $23,800
B) $18,427
C) $24,958
D) $16,867
E) $19,650
Answer: B
Q3) The majority of a pension fund's return is explained by asset allocation.
A)True
B)False
Answer: True
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Chapter 3: The Global Market Investment Decision
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Q1) For a U.S.based investor,a weaker dollar means that overall dollar based returns on overseas security investment will be higher because
A) A weaker dollar means that exports will rise.
B) A weaker dollar means that more foreign investors will by U.S. securities.
C) A weaker dollar means that the foreign currency will convert to more dollars.
D) A weaker dollar means that more investors will purchase the foreign security.
E) None of the above.
Answer: C
Q2) Warrants are options often issued in connection with the sale of fixed income securities.
A)True
B)False
Answer: True
Q3) A Eurobond is an international bond
A) Sold by an issuer within its own country in that country's currency.
B) Denominated in a currency not native to where it is issued.
C) Also known as a Yankee Bond.
D) Denominated in U.S. dollars but issued by a foreign company.
E) That is sold only to European investors.
Answer: B
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Chapter 4: Securities Markets: Organization and Operation
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Q1) A corporation wishing to raise funds will normally want the investment banker to use a "best efforts" arrangement rather than a negotiated basis.
A)True
B)False
Q2) When an investor borrows part of the investment cost it is known as
A) A short sale.
B) A fill or kill order.
C) A margin transaction.
D) A limit order.
E) Going long.
Q3) Which of the following is an underwriting function?
A) Origination
B) Risk-bearing
C) Distribution
D) Choices b and c
E) All of the above
Q4) The primary market is where issues are traded between current and potential owners.
A)True
B)False
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Chapter 5: Security-Market Indexes
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Q1) Refer to Exhibit 5.5.Calculate the price weighted series for Dec 31,2004.
A) 121.25
B) 119.25
C) 100.0
D) 72.5
E) 81.69
Q2) There are no composite series currently available that will measure the performance of all securities (i.e.stocks and bonds)in a given country.
A)True
B)False
Q3) Which of the following is <b>not</b> a global equity indicator series?
A) Morgan Stanley Capital International Indexes
B) Dow Jones World Stock Index
C) FT/S & P-Actuaries World Indexes
D) Merrill Lynch-Wilshire World Indexes
E) None of the above (that is, each is a global equity indicator series)
Q4) Bond-market indicator series have been around much longer than stock-market indicator series.
A)True
B)False
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Chapter 6: Efficient Capital Markets
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Q1) Studies examining stock splits support the semistrong form efficient market hypothesis.
A)True
B)False
Q2) Refer to Exhibit 6.4.What is the abnormal rate of return for Stock B when you consider its systematic risk measure (beta)?
A) 0.1%
B) -1.4%
C) 0.5%
D) 1.5%
E) 2.0%
Q3) Refer to Exhibit 6.5.What is the abnormal rate of return for Stock Z during period t using only the aggregate market return (ignore differential systematic risk)?
A) 1.80
B) 1.40
C) -1.80
D) -4.80
E) -8.80
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Chapter 7: An Introduction to Portfolio Management
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Q1) Assuming that everyone agrees on the efficient frontier (given a set of costs),there would be consensus that the optimal portfolio on the frontier would be where the ratio of return per unit of risk was greatest.
A)True
B)False
Q2) The most important criteria when adding new investments to a portfolio is the
A) Expected return of the new investment.
B) Standard deviation of the new investment.
C) Correlation of the new investment with the portfolio.
D) Both a and b
E) All of the above are equally important
Q3) Refer to Exhibit 7.6.What is the standard deviation of this portfolio?
A) 6.08%
B) 5.89%
C) 7.06%
D) 6.54%
E) 7.26%
Q4) A measure that only considers deviations above the mean is semi-variance.
A)True
B)False
9
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Chapter 8: An Introduction to Asset Pricing Models
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Q1) The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)
A) Zero beta model.
B) unstable beta or a higher borrowing rate.
C) Zero beta model or a higher borrowing rate.
D) higher borrowing rate.
E) unstable beta.
Q2) Studies have shown the beta is more stable for portfolios than for individual securities.
A)True
B)False
Q3) There can be only one zero-beta portfolio.
A)True
B)False
Q4) Studies have shown that a well-diversified investor needs as few as five stocks. A)True
B)False
Q5) The usefulness of CAPM theory is limited in practice due to benchmark error. A)True
B)False
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Chapter 9: Multifactor Models of Risk and Return
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Q1) Refer to Exhibit 9.2.The expected prices one year from now for stocks X,Y,and Z are
A) $53.55, $54.4, $55.25
B) $45.35, $54.4, $55.25
C) $55.55, $56.35, $57.15
D) $50, $50, $50
E) $51.35, $47.79, $51.58.
Q2) Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.
A)True
B)False
Q3) The APT assumes that security returns are normally distributed.
A)True
B)False
Q4) Fama and French suggest a four factor model approach that explains many prior market anomalies.
A)True
B)False
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Chapter 10: Analysis of Financial Statements
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Q1) Refer to Exhibit 10.1.What is BMC'S operating profit margin?
A) 0.800
B) 0.054
C) 0.080
D) 0.540
E) 5.480
Q2) The market liquidity of a security can be measured using
A) Trading turnover.
B) Bid-Ask spread.
C) Price of the security.
D) a and b.
E) b and c.
Q3) Refer to Exhibit 10.3.Calculate the inventory turnover ratio.
A) 27.23
B) 23.3
C) 55.43
D) 8.67
E) 11.67
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Chapter 11: Security Valuation Principles
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Q1) The value of preferred stock can be calculated by dividing its dividend by the required rate of return.
A)True B)False
Q2) An equity investor's required rate of return is influenced by the economy's real risk-free rate,the expected rate of inflation,and a risk premium.
A)True B)False
Q3) A company's dividend last year was $3.00.Dividends are expected to grow indefinitely at 7% and the required rate of return for the stock is 13%.What is the value of the stock today?
A) $2.83
B) $23.08
C) $24.69
D) $50.00
E) $53.50
Q4) A preferred stock is a perpetuity.
A)True B)False
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Chapter 12: Macroanalysis and Microvaluation of the Stock Market
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Q1) There are three techniques available to help an investor make a market decision.Which of the following is <b>not</b> such an analysis technique?
A) Macro techniques that are based on the strong relationship between the economy and security markets.
B) Micro techniques that estimate future market values by applying one of several basic valuation models to equity markets.
C) Technical analysis where an investor analyzes past and recent market movements for indications of future performance.
D) Fundamental analysis that considers the effect of market on the entire portfolio.
E) None of the above (that is, all are techniques available to make market decisions)
Q2) When estimating a major stock market value using the earnings multiplier approach near-term estimates of the required rate of return and growth rate are essential due to the impact of near-term events on cash flows.
A)True
B)False
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Chapter 13: Industry Analysis
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Q1) Which of the following is <b>not</b> characteristic of the "growth" phase in the industry life cycle?
A) Consumer will accept uneven quality
B) Products have technical and performance differentiation
C) High advertising costs
D) Low profits
E) Many competitors
Q2) When considering inputs,you would evaluate an industry's prospects based on those of its raw material suppliers,labor force,etc.
A)True
B)False
Q3) In analyzing risk levels among industries,studies have found that
A) risk levels vary among different industries.
B) risk levels remained fairly constant across industries.
C) risk levels for the same industry varied over time.
D) risk levels for the same industry remain fairly constant over time.
E) Choices a and d
Q4) In the rapid accelerating growth stage,profit margins are typically very high.
A)True
B)False
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Chapter 14: Company Analysis and Stock Valuation
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Q1) Which of the following statements concerning SWOT analysis is false?
A) Strengths are the factors that give the firm a comparative advantage in the marketplace.
B) Weaknesses result when the company has potentially exploitable advantages over other firms.
C) Opportunities are environmental factors that favor the firm.
D) Threats are environmental factors that can hinder the firm in achieving its goals.
E) None of the above (that is, all statements are true)
Q2) The Pekay Company has FCFE of $800.FCFE is expected to grow by 7% next year.The cost of capital is 7% and the level of debt is $4000.The number of shares outstanding is 700.Calculate the firm's share price.
A) $44.25
B) $65.12
C) $38.19
D) $40.76
E) $50.56
Q3) A firm's competitive strategy can be either defensive or offensive.
A)True
B)False
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Chapter 15: Equity Portfolio Management Stragtegies
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Q1) Which of the following is <b>not</b> considered an active management strategy?
A) Sector rotation
B) Use of factor models
C) Quantitative screens
D) Full replication
E) Linear programming
Q2) If the annual geometric mean for the equity risk premium is 8.4 percent,what percentage of the equity risk premium is consumed by trading costs of 1.2 percent?
A) 7.20%
B) 9.60%
C) 9.70%
D) 10.08%
E) 14.29%
Q3) Growth stocks would have the following characteristics:
A) Low price/book, high price/earnings.
B) Low price/book, low price/earnings.
C) High EPS growth, high profitability.
D) Low EPS growth, high profitability.
E) None of the above.
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Chapter 16: Technical Analysis
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Q1) A rise in the Confidence Index published by Barron's is an indication investors will purchase more lower-quality bonds.
A)True
B)False
Q2) A divergence between an increase in a stock market series and the rest of the stock market can be detected using
A) Debit balances in brokerage accounts
B) Short interest
C) The advance-decline line
D) Confidence index
E) None of the above
Q3) Empirical analysis suggests that trigger points for trading rules are relatively stable over time.
A)True
B)False
Q4) The Dow theory contends that stock price movements are similar to the movement of tides,waves,and ripples.
A)True
B)False
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Chapter 17: Bond Fundamentals
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Q1) Bonds can have different types of collateral and can be either secured,unsecured or registered bonds.
A)True
B)False
Q2) Which of the following statements regarding Collateralized Debt Obligations (CDOs)is <b>false</b>?
A) CDOs experienced rapid growth since the year 2000.
B) The assets used to back the CDOs are substantially diverse.
C) The credit quality within a CDO at the time of issue is diverse.
D) CDOs have generated significant credit and liquidity problems.
E) All of the above statements are true.
Q3) At what point would an investor be indifferent between a Trifton corporate bond yielding 12.0 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?
A) 6.00%
B) 7.10%
C) 9.00%
D) 9.15%
E) 14.00%
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Chapter 18: The Analysis and Valuation of Bonds
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Q1) Refer to Exhibit 18.2.What is the Macaulay duration of the Talmart corporate bonds?
A) 3.43
B) 3.64
C) 3.76
D) 3.85
E) 4.11
Q2) Refer to Exhibit 18.3.Calculate the Macaulay duration for the bond.
A) 3.19 years
B) 3.36 years
C) 3.57 years
D) 3.72 years
E) 3.84 years
Q3) Refer to Exhibit 18.1.Calculate the Macaulay duration for the bond.
A) 4.19 years
B) 4.36 years
C) 8.72 years
D) 8.38 years
E) 9.52 years
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Chapter 19: Bond Portfolio Management Strategies
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Q1) If an investor swaps identical issues to establish a loss,the loss is disallowed and the transaction is known as a
A) Switch sale.
B) Wash sale.
C) Green shoe.
D) Flashback.
E) White knight.
Q2) Refer to Exhibit 19.11.Calculate the percentage gain per invested dollar for Bond X assuming a one year horizon,and a reinvestment rate of 8% per year.
A) 2.35%
B) 4.08%
C) 7.92%
D) 8.16%
E) 8.32%
Q3) The components of interest rate risk are: price risk and maturity risk.
A)True
B)False
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Chapter 20: An Introduction to Derivative Markets and Securities
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Q1) The futures market is a dealer market where all the details of the transactions are negotiated.
A)True
B)False
Q2) Which of the following statements are <b>true</b>?
A) Futures contracts have less liquidity risk and credit risk than forward contracts.
B) Futures contract prices are strongly linked to the prevailing level of the underlying spot index.
C) Futures contract decrease in price, the further forward in time the delivery date is set.
D) All of the above.
E) None of the above.
Q3) Refer to Exhibit 20.1.How much must you deposit in a margin account if you wish to purchase one contract?
A) $267,232.5
B) $29,450
C) $29,692.50
D) $30,000
E) $265,050
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Chapter 21: Forward and Futures Contracts
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Q1) Financial futures have become an increasingly attractive investment alternative since the Chicago Board of Trade (CBOT)began trading them in 1977,and their hedging function partly accounts for the growth in trading.Which of the following statements concerning financial futures is true?
A) Financial futures protect the investment portfolio against inflation in the economy.
B) Investors seek protection against the increasing volatility of interest rates.
C) Unlike commodity futures, factors that influence price shifts are not supply and demand of the commodity but buyer psychology.
D) A reason for their popularity is that trading is restricted to government obligations, which reduces risks.
E) All of the above are true statements
Q2) Refer to Exhibit 21.8.Calculate the overall profit.
A) $1,550,000
B) -$2,000,000
C) $2,050,000
D) -$5,000,000
E) $2,400,000
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Chapter 22: Option Contracts
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Q1) A straddle is the simultaneous purchase (or sale)of a put and call option with the same underlying asset,
A) Same exercise price, and expiration date.
B) Same exercise price but different expiration date.
C) Same expiration date but different exercise price.
D) Either choices b or c.
E) None of the above.
Q2) Stock options expire on the Sunday following the third Saturday of the designated month.
A)True
B)False
Q3) In the Black-Scholes model N(d )represents the A) Hedge ratio.
B) Partial derivative of the call's value with respect to the stock price.
C) Change in the option's value given a one dollar change in the underlying security's price.
D) Option's delta.
E) All of the above.
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Chapter 23: Swap Contracts,convertible Securities,and
Other Embedded Derivatives
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Q1) Refer to Exhibit 23.2.Assuming that 3-month LIBOR is 5.00% on the rate determination day,and the contract specified settlement in advance,describe the transaction that occurs between the dealer and Darden.
A) The dealer is obligated to pay Darden $30,864.20.
B) The dealer is obligated to pay Darden $19,359.61.
C) Darden is obligated to pay the dealer $19,359.61.
D) Darden is obligated to pay the dealer $30,864.20.
E) None of the above
Q2) An equity call option issued directly by the company whose stock serves as the underlying asset is known as a
A) Collar.
B) Cap.
C) Floor.
D) Warrant.
E) Swap.
Q3) The intrinsic value of a warrant = (Market price of common stock + Warrant exercise price)× Number of shares specified by the warrant.
A)True
B)False
Page 25
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Chapter 24: Professional Money Management, alternative
Assets, and Industry Ethics
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Q1) An investment vehicle that acts like a mutual fund of hedge funds,and allows investors access to managers that might otherwise be unavailable is known as
A) Managed futures funds
B) Long-short equity funds
C) Fund of funds
D) Private equity funds
E) Leveraged Buyouts (LBOs)
Q2) On January 2,2003,you invest $50,000 in the Lizbiz Mutual Fund,a load fund that charges a fee of 5%.The fund's returns were 14.6% in 2003,-6.4% in 2004,15.2% in 2005.On December 31,2005 you redeem all your shares.The dollar value is
A) $66,722.27
B) $15,200.00
C) $58,695.74
D) $33,366.25
E) $10,000.00
Q3) Hedge funds are far less liquid than mutual fund shares.
A)True
B)False
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Chapter 25: Evaluation of Portfolio Performance
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Q1) Refer to Exhibit 25.2.Using the Sharpe Measure,which portfolio performed best?
A) W
B) X
C) Y
D) Z
E) Two portfolios are tied
Q2) A portfolio manager should be evaluated many times and in a variety of market environments before a final judgment is reached regarding his/her strengths and weaknesses.
A)True
B)False
Q3) A test of bond performance over time indicated that bond portfolio managers are more consistent over time than equity managers.
A)True
B)False
Q4) The information ratio permits only relative assessments of performance for different portfolios in a style class.
A)True
B)False
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Chapter 26: Investment Return and Risk Analysis Questions
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Q1) An investment has a standard deviation of 12 percent and an expected return of 7 percent.What is the coefficient of variation for this investment?
A) 1.714
B) 1.372
C) 0.714
D) 0.583
E) 0.500
Q2) Refer to Exhibit 1A.1.The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) Refer to Exhibit 1A.1.The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter 27: Investment and Retirement Plans
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Q1) Which of the following statements concerning defined benefit plans is <b>false</b>?
A) The company bears the risk of investments
B) Employees are entitled to either a lump-sum payment or income stream at retirement
C) Risk tolerance depends on funding status and its actuarial rate
D) Defined benefit plans for young workers are typically more conservatively invested than defined contribution plans
E) All of the above are true statements
Q2) Which of the following is <b>not</b> true regarding defined contribution pension plans?
A) Employees make regular contributions to the plan.
B) Employers make regular contributions to the plan.
C) The employer bears all of the investment risk.
D) Benefits are directly related to the earnings of the funds investments.
E) The number of defined contribution plans is increasing.
Q3) Banks have high liquidity needs and therefore,have a short time horizon.
A)True
B)False
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Chapter 28: Calculating Covariance and Correlation
Coefficient of Assets
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Q1) Refer to Exhibit 3A.1.Calculate the covariance.
A) -32.20
B) -23.32
C) 1.00
D) 23.32
E) 32.20
Q2) What is the correlation coefficient for two assets with a covariance of .0032,if asset 1 has a standard deviation of 12 percent and asset 2 has a standard deviation of 9 percent?
A) 0.2963
B) 0.3456
C) 0.8721
D) 1.5980
Q3) Refer to Exhibit 3A.1.Calculate the coefficient of correlation.
A) -0.456
B) -0.354
C) 0.000
D) 0.456
E) 3.538
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Chapter 29: Portfolio Variance and Stock Weight
Calculations
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Q1) Refer to Exhibit 7A.1.Show the minimum portfolio variance for a two stock portfolio when r<sub>1.2</sub> = 1.
A) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
B) E(?<sub>2</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
C) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) - E(?<sub>2</sub>)]
D) E(?<sub>1</sub>) ¸ [E(?<sub>1</sub>) + E(?<sub>2</sub>)]
E) None of the above
Q2) Refer to Exhibit 7A.1.What weight of security 1 gives the minimum portfolio variance when r<sub>1.2 </sub>= .60,E(?<sub>1</sub>)= .10 and E(?<sub>2</sub>)= .16?
A) .0244
B) .3679
C) .5697
D) .6309
E) .9756
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Chapter 30: Portfolio Optimization with Negative
Correlation: Finding Minimum Variance and Weight
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Sample Questions
Q1) Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r . = -1.
A) E( 1) ¸ [E( 1) + E( 2)]
B) E( 1) ¸ [E( 1) - E( 2)]
C) E( 2) ¸ [E( 1) + E( 2)]
D) E( 2) ¸ [E( 1) - E( 2)]
E) None of the above
Q2) Refer to Exhibit 7B.1.What is the value of W when r . = -1 and E(s )= .10 and E(s )= .12?
A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%
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