FSI Midterm questions with complete solutions

FSI Midterm questions with complete
solutions


What is JP Morgan's single biggest contribution to the Financial
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Services Industry? - answer-JP Morgan is credited with the creation and development
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of the debt
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and equity capital markets as they exist today.
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Why would a company use a Project Financing Structure instead of financing "on
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Cbalance sheet"? What are Project Financing's
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characteristics, how does it work and what industries typically use C C C C C C C C C


Project Financing? - answer-The Project Financing Structure limits the liability of the
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Cequity sponsor C


to just the equity that is infused into the project. This helps a highly
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rated sponsor of a project by limiting recourse to its balance sheet. This
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is especially important if there is significant credit/financing/operational
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risk associated with the project. For an equity sponsor with a poor
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credit rating or limited financial wherewithal, the Project Financing
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Structure can achieve a higher credit rating for the project than the
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sponsor and results in increased financing wherewithal for the project
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than that of the equity sponsor on a stand-alone basis.
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Describe or draw the structure and stock/cash flows of an ETF. What
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is the key part of that structure that make this investment vehicle so
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popular with retail investors? - answer-When an ETF wants to create ETF shares, it
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Cissues Creation Units to an C C C C


Authorized Participant (AP). Creation Units are ETF shares that are
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offered to an AP at a discount to where the ETF shares are/will be
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trading with Retail Investors. The AP then goes to a Broker/Dealer (if
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the AP is not a Broker/Dealer) and buys from the Market the shares of
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the stocks that are to go into the ETF. The value of the portfolio of Stock
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Shares matches that of the ETF Shares. The Creation Units are then sold
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as ETF Shares to retail investors through a Broker/Dealer. If the ETF
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Shares become popular with retail investors and the ETF Share price
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exceeds the value of the underlying Stock Shares in the ETF, the AP can
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be issued more Creation Units. The AP will then buy more Stock Shares,
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place them in the ETF and sell the newly created Creation Units to the
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retail market, increasing the number of ETF Shares in the Retail market
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and thereby reducing the price of those shares. Likewise, if the ETF
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Shares decline in value such that their price is less than the value of the
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, Stock Shares in the ETF, the AP can buy the ETF Shares from the retail
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market, exchange them with the ETF for Stock Shares in the ETF and sell
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the Stock Shares to the Market through a Broker/Dealer. The decline in
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the number of ETF Shares in the Retail market will cause the price of
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those shares to increase. This arbitrage mechanism is facilitated by the
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AP receiving Creation Units at a Discount to where the ETF Shares are
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trading in the Retail Market. This guarantees the AP a risk free bid/ask
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spread while allowing retail investors to trade the ETF shares in real
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time at a then market clearing price. AP income from facilitating these
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trades is risk free and as such, competition for this business maintains a
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very tight bid/ask spread between the Creation Units price and the E
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What are the two main reasons that ETF's are gaining in popularity
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versus traditional Mutual Funds? - answer-1. Low fees.
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2. Real time trading (not being restricted to one price setting per day
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at 4pm Eastern Time).
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Why is asset management viewed as such an attractive business by
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financial services institutions? What is the name of the largest asset
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management company? - answer-Asset management is attractive to financial
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Cinstitutions because it is a C C C C


fee-based business and requires no capital. As such it is a steady source
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of revenue for a firm and its returns on capital are enormous. It
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provides a perfect offset to the more cyclical business a financial firm
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may be engaged in such as M&A. It also has large barriers to entry and
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the business is "sticky", which means that it takes a lot to lose the
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business once a firm has won it. The name of the largest asset
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manager in the world is Blackrock which has approximately $10 trillion
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under management.
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Why is Blackstone trying to pitch itself as an asset manager while
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Blackrock is quietly getting into private equity? - answer-Asset managers are viewed
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Cas fiduciaries that collect a fee from
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managing other institutions money. The business requires very little
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capital and is viewed as stable with predictable low risk cash flows. As
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such, asset managers trade at a very high multiple relative to other
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publically traded financial services companies. Blackstone trades at a
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discount to Blackrock given it is viewed as a private equity firm. Private
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equity firms require a great deal of capital from LP's, have a very long
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investment horizon from first money invested until the last money is
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returned to investors, and use opaque accounting so it is difficult to
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really understand as an LP whether you are actually making money.
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Private equity also suffers from the "masters of the universe" taint, aka,
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shareholders don't get anything until the GP is satisfied with its own
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compensation. Shareholders view themselves as disadvantaged as a C C C C C C C


result which causes private equity firms to trade at a discount relative
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