Banking Investment Banking 1

Question 1

What is the primary role of an investment bank in an IPO?

Accepted Answer

Underwrite and distribute the new shares to the public

Answer

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?

Accepted Answer

The investment bank

Answer

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?

Accepted Answer

A notice announcing a completed securities offering

Answer

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?

Accepted Answer

Prospectus (S-1)

Answer

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?

Accepted Answer

An option allowing underwriters to sell additional shares if demand is high

Answer

A greenshoe (overallotment) option lets underwriters sell up to 15% more shares than originally planned to stabilize the stock price after an IPO.

Banking Practice Test