Series 79 – Investment Banking Representative Exam Capital Markets & Underwriting 2 — Questions and Answers
Question 1: What is the purpose of a 'roadshow' in the context of a securities offering?
- To visit SEC regional offices for regulatory review
- To present the investment opportunity to institutional investors and gauge demand before setting the offering price (Correct answer)
- To conduct due diligence at the issuer's facilities
- To market the offering exclusively to retail investors
Correct answer: To present the investment opportunity to institutional investors and gauge demand before setting the offering price
The roadshow is a series of presentations by the issuer and underwriters to institutional investors to generate interest, build the order book, and help determine appropriate pricing.
Question 2: In a debt offering, a 'covenant-lite' loan is characterized by:
- A floating interest rate tied to SOFR
- The absence of maintenance financial covenants that would require the borrower to meet ongoing financial tests (Correct answer)
- A mandatory amortization schedule of 25% per year
- Priority over all other debt in the capital structure
Correct answer: The absence of maintenance financial covenants that would require the borrower to meet ongoing financial tests
Covenant-lite loans lack maintenance covenants (e.g., leverage ratio tests), giving borrowers more flexibility but providing less protection to lenders compared to traditional leveraged loans.
Question 3: What does it mean when a bond is issued 'at a discount to par'?
- The bond's coupon rate exceeds the market interest rate
- The bond is sold for less than its face value, resulting in a yield higher than the stated coupon (Correct answer)
- The issuer has a below-investment-grade credit rating
- The bond matures in less than one year
Correct answer: The bond is sold for less than its face value, resulting in a yield higher than the stated coupon
When a bond is issued below par value, investors pay less than the face amount, which increases the effective yield above the coupon rate to compensate for the price difference.
Question 4: Which registration exemption allows companies to raise up to $75 million from both accredited and non-accredited investors under a simplified process?
- Rule 144A
- Regulation D Rule 506(b)
- Regulation A+ (Tier 2) (Correct answer)
- Section 4(a)(2)
Correct answer: Regulation A+ (Tier 2)
Regulation A+ Tier 2 allows companies to raise up to $75 million per year from accredited and non-accredited investors through a streamlined 'mini-IPO' process with reduced disclosure requirements.
Question 5: In a syndicated loan, a 'term loan B' (TLB) is typically characterized by:
- Fully amortizing principal payments over five years
- Minimal amortization (1% per year) with a bullet payment at maturity, held primarily by institutional investors (Correct answer)
- A revolving credit facility with daily draws and repayments
- Investment-grade pricing with tight covenants
Correct answer: Minimal amortization (1% per year) with a bullet payment at maturity, held primarily by institutional investors
Term Loan B features minimal annual amortization with a large bullet repayment at maturity and is typically distributed to institutional investors like CLOs and hedge funds.
Question 6: When underwriters 'stabilize' an offering, they are permitted under Regulation M to:
- Buy shares in the open market at or below the offering price to prevent the stock from falling below the IPO price (Correct answer)
- Issue additional shares beyond the greenshoe allocation
- Restrict short selling by hedge funds during the lock-up period
- Force selling shareholders to hold their shares for 180 days
Correct answer: Buy shares in the open market at or below the offering price to prevent the stock from falling below the IPO price
Regulation M permits underwriters to engage in stabilizing bids by purchasing shares at or below the offering price in the open market to support the stock after an IPO.
Series 79 – Investment Banking Representative Exam Capital Markets & Underwriting 2
What is the purpose of a 'roadshow' in the context of a securities offering?