Banking Investment Banking 1 — Questions and Answers
Question 1: What is the primary role of an investment bank in an IPO?
- Underwrite and distribute the new shares to the public (Correct answer)
- Provide FDIC insurance on the offering
- Set the federal funds rate for the offering period
- Issue regulatory approval on behalf of the SEC
Correct answer: Underwrite and distribute the new shares to the public
Investment banks act as underwriters in an IPO, helping price the shares and distribute them to institutional and retail investors.
Question 2: In a 'bought deal,' who bears the risk if the securities cannot be sold at the agreed price?
- The issuing company
- The investment bank (Correct answer)
- The SEC
- Retail investors
Correct answer: The investment bank
In a bought deal, the investment bank purchases the entire offering from the issuer and assumes the risk of reselling it to investors.
Question 3: What does the term 'tombstone advertisement' refer to in investment banking?
- A notice announcing a completed securities offering (Correct answer)
- An ad warning of a failed merger
- A regulatory filing for a bankrupt firm
- A prospectus for a bond default
Correct answer: A notice announcing a completed securities offering
A tombstone advertisement is a formal notice published after a securities offering is completed, listing the issuer, deal size, and underwriters.
Question 4: Which document provides potential investors with detailed financial and business information before an IPO?
- Term sheet
- Prospectus (S-1) (Correct answer)
- Form 10-K
- Commitment letter
Correct answer: Prospectus (S-1)
The S-1 prospectus filed with the SEC gives investors material information about the company's financials, risks, and use of proceeds before the IPO.
Question 5: What is a 'greenshoe option' in an underwriting agreement?
- An option allowing underwriters to sell additional shares if demand is high (Correct answer)
- A penalty clause for late filings
- A lock-up period restriction on insiders
- A cap on underwriter fees
Correct answer: An option allowing underwriters to sell additional shares if demand is high
A greenshoe (overallotment) option lets underwriters sell up to 15% more shares than originally planned to stabilize the stock price after an IPO.
Question 6: In M&A advisory, what is a 'fairness opinion'?
- A legal ruling by the DOJ on antitrust grounds
- A written assessment by a bank that a transaction price is fair (Correct answer)
- A shareholder vote approving the merger terms
- An SEC letter confirming the deal complies with securities law
Correct answer: A written assessment by a bank that a transaction price is fair
A fairness opinion is a professional assessment, typically issued by an investment bank, confirming that the financial terms of a transaction are fair to shareholders.
Banking Investment Banking 1
What is the primary role of an investment bank in an IPO?