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Flashcards in Test 1 Deck (51)
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1
Q

Boutique banks

A

Principally M&A, also financial restructuring and money management

2
Q

Retail brokerage firms

A

Compete with large investment banks in relation to retail client investments and stocks and bonds (also securities firm)

3
Q

Sections of an Investment Bank

A

a. Investment banking business managed by the Investment Banking Division that principally focuses on capital raising and M&As
b. A sales and trading division managed by the Trading Division that provides investing, intermediating, and risk-management services.
c. An asset management business managed by the Asset Management Division that is responsible for managing the money for individual and institutional investing clients

4
Q

Key product groups

A

M&A (specialize in a specific industry within the division) and Capital Markets

5
Q

Capital Markets groups

A

Debt capital markets or equity markets

6
Q

Client coverage bankers

A

Part of the investment banking division that works directly with the company and focuses on raising capital for a company. They have to become very familiar with the company so that they can optimize the amount of cash and debt on their balance sheet

7
Q

Components of a M&A

A

Client coverage bankers work with product bankers to execute the transaction. They act as a trusted advisor for the corporate clients in terms of strategic financial decisions

8
Q

M&A Group

A

Sometimes own separate entity in bank, sometimes combined with client coverage bankers. Parts: sell side, buy side, restructurings or acquisitions that all try to increase shareholder value

9
Q

Trading Division

A

Contains two parts: Fixed income, currencies, and commodities; and equities

10
Q

Trading Division: FICC

A

Trades government bonds, corporate bonds, mortgage-related securities, asset-back securities, currency, and commodities (sometimes participate in proprietary trading as well)

11
Q

Trading Division: Equities

A

Makes markets in and trades equities, equity-related products, and derivatives. Also engage in proprietary trading as well.

12
Q

Capital Markets: Equity Capital Markets

A

Comprised of bankers who specialize in common stock, convertible security issuance, and equity derivatives. This group acts as the intermediary between Investment Banking’s Division and the Trading Division, which creates competing interests because one side is trying to sell high while the other buy low.

13
Q

Capital Markets: Debt Capital Markets

A

Focus on debt financing for corporate and government clients. Divided into investment grade (high rating) and non-investment grade issuers (low rating). They stand between corporate or government issuers and investors.

14
Q

Prime Brokerage business

A

Most investment banks have this in their business and they provide bundled services such as securities borrowing and lending, etc. They provide investors with a centralized location to clear their securities and finances, while also allowing them to trade with brokers.

15
Q

Principal Investing

A

The portion of an investment banks that trades their firm’s capital to raise money. However, the Dodd-Frank Act only allows banks to have a 3% or less stake in the fund they are investing in within one year.

16
Q

LBO (Leveraged Buyout)

A

Also known as taking a company private… A form of principal investment where they buy a public company with their capital.

17
Q

Proprietary Trading

A

Function of the non-client investing portion of an investment bank. This is where banks use large amounts of their capital to invest in the market, competing with large hedge funds. However, the Dodd-Frank act will severely limit their ability to use capital.

18
Q

Asset Management Division

A

Offers equity, fixed income, alternative investments (hedge funds, real estate, etc.) and money market investment products. They are offered in the forms of mutual funds, private investment funds or separately managed funds. Their is usually a Private Wealth Management team alongside this division as well.

19
Q

Asset Management: Alternative assets

A

Includes private equity (LBOs and other equity), hedge-fund type investments, and real estate. They often invest some of their own capital alongside their clients.

20
Q

The Securities Act of 1933

A

Requires that investors receive information about public companies that they are investing in and makes sure that the companies are not deceiving their investors and other fraud

21
Q

Glass Steagall Act (1933)

A

Limited the underwriting capabilities of commercial banks and separated commercial and investment banks. The FDIC was also created to insure your funds

22
Q

Securities and Exchange Act of 1934

A

Requires the filing of quarterly and annual reports, that exchanges are overseen by self-regulatory organizations (SROs), created the SEC to look over the public markets, and insider trading is prohibited

23
Q

Gramm-Leach-Bliley Act (1999)

A

Overturned the separation of investment banks and commercial ones

24
Q

Dodd-Frank Act (2010)

A

Established warning system for emerging market risks (liquidation/bailout plans), created Consumer Protection Agency to protect consumers and investors, regulates over-the-counter derivatives (CDOs, etc), and restrains proprietary trading by investment banks and limits their stake in directly investing in fund (hedge and private equity)

25
Q

Equity vs. debt financing

A

Equity financing looks better on the balance sheet, which helps their credit rating, but it may dilute their EPS. Debt financing looks poor on a balance sheet, but has a lower cost of capital.

26
Q

Debt financing options

A

Investment and non-investment grade bonds, investment grade loans, low-grade loans, asset-back securities, and commercial paper.

27
Q

Asset-backed securities

A

Debt securities that have interest and principal payments that are backed by underlying cash flows from other assets such as mortgage/auto/student loans or leases.

28
Q

Special purpose vehicles

A

Third parties who buy banks’ asset-backed securities and then resell them to insulate investors from credit risk

29
Q

Equity financing options

A

IPOs, Follow-on offerings, and convertible securities

30
Q

Follow-on offerings

A

Companies that want to issue more shares after the IPO has originally been sold

31
Q

Green Shoe Over-allotment Option

A

A bank will issue a loan for 100% of the capital that is agreed on and then a 15% additional volume of shares is set aside based on whether the stock price rises or falls. If the the price rises, the borrower can then invest that extra 15% in the company to receive a profit from the increase in price. If the stock price falls, then those 15% shares are shorted and the bank receives a small profit for the difference in shorting price. Plus if the stock price drops, the 15% slightly increases demand for the stock, which in turn stabilizes the price.

32
Q

Traders job

A

Supporting primary market transactions, which involve purchasing securities directly from a corporation or government and then reselling them (underwriting) and then also participating in secondary markets by buying and selling previously issued stocks

33
Q

Pricing securities options

A

IPOs, follow-on equity, or convertible securities

34
Q

Equity traders

A

Trade common shares, derivatives on common shares, convertibles, etc. Each trader focuses on their own specific set of securities that they manage

35
Q

Trading: Prime brokerage

A

Borrow large amounts of cash from buying securities in order to leverage trades and make high profits. Usually the most profitable section of an investment bank

36
Q

Securities lending

A

Intended for investors who are planning on holding onto securities for a long time and are willing to lend those securities out to other parties during the maturing process for a fee.

37
Q

Rebate

A

The rate that borrowers pay to a lender of a long-time security holder

38
Q

Short selling

A

When shares are loaned, title to the shares is transferred to the party that the borrower sells stock short to. Since they have the title to the loan they could receive dividends from the company during that time. Therefore, if dividends are given out, the borrower of the loan can demand cash that is equal to the dividends.

39
Q

Lending shares rule

A

Shares are fungible meaning they are completely interchangeable, which allows a borrower of shares to return to the lender different (but equal) shares.

40
Q

Short interest ratio

A

The short interest ratio is the number of shares sold short divided by the daily trading volume. High short interest ratio can imply a bearish market

41
Q

Value at risk (VaR)

A

Represents the potential loss in value of trading positions due to adverse market movements… So if a company has a VaR of $50 million, then they are 95% confident they they will not lose more than $50 million of the interest rate portfolio in any given day

42
Q

Asset Management Division

A

Professional management of investment funds for individuals, families and institutions (stocks, bonds, convertibles, and real estate).

43
Q

Alternative assets fees

A

Management fees range from 1-2% of assets under management (AUM). Fees percentages decrease as funds get bigger, however, if the security value increases, the management team gets a percentage of the increase as well.

44
Q

Equity and convertible investments fees

A

Fees range from .75-1.75% but don’t change much once issued

45
Q

Bond and commodity investments fees

A

Fees range from .5-1.5%

46
Q

Indexes fees

A

Usually even smaller like .1 - .5%

47
Q

Hedge Fund Investments

A

Many investment banks have hedge funds within their asset management group that invest large amounts of capital in a wide-range of asset classes.

48
Q

Private Equity Investments

A

Most large investment banks also participate in private equity as well… Banks are now only allowed to advise clients on principal investments and can’t invest along side them…

49
Q

Wealth Management

A

Select advice to individual clients, families or institutional clients. Assist them on where to invest and how. Usually at least $5 million but some higher than that as a minimum.

50
Q

Research

A

Now banks separate their research departments from the rest of the divisions because of a conflict of interest where earlier firms were telling their research analysts to leave out negative parts of say an M&A for example so that things run smoothly.

51
Q

Regulation FD

A

In response to many firms using their research to fraud their deals and make them look more positive than they actually were. In the past, large institutions would get valuable information first about stock movements and the other investors would get screwed because they got the info later. FD (fair disclosure) brings transparency to the research that is being done and allows all investors to receive SEC filed research reports all at the same time.