Chapter 1 Practice Question Answers
- 1. Answer: D. Commodities futures and insurance contracts that do not have a variable component (where a portion of the value is invested in the markets) are not considered securities. Publicly traded stocks, bonds, and options are all considered securities.
- 2. Answer: C. Due diligence should include a review of the issuer’s financial statements, an in-person visit with management, and a review of competitors in the industry. These activities should be done prior to starting an initial public offering.
- 3. Answer: A. The Agreement Among Underwriters (AAU) is an agreement among all underwriters in the syndicate. This agreement is also called the syndicate or purchase group agreement. It includes the:
- » Duties and rights of each member of the syndicate
- » Allocation of shares and the liability of each underwriter
- » Identity of the lead underwriter and any co-managers, and grants authority to the lead underwriter to make stabilizing bids and enter into the underwriting agreement on behalf of the syndicate
- » Details of the compensation for each underwriter and the concessions offered
- 4. Answer: B. During the cooling-off period, companies are restricted from advertising and selling their new offering of securities. Offers of securities are only allowed through a preliminary prospectus or a free writing prospectus. Underwriters are allowed to collect indications of interest. Companies are allowed to publish tombstone ads that provide general information about a new offering.
- 5. Answer: B. There are three important underwriting agreements for a new offering: the syndicate agreement, the underwriting agreement, and the Selling Group Agreement. A hypothecation agreement is an agreement signed by a customer opening a margin account, and it is not related to a new securities issue.
- 6. Answer: A. A prospectus must be provided to customers who buy the se