1.  Overview of the Financial Industry Last Edited: October 4 th, 2013

2. Overview of the Financial Industry Purpose of the Financial Industry _______________________________________________________________________ ■ Companies need funds in order to purchase capital goods (real estate, buildings, machines, etc.), inventories, and pay for labor. They also need money to fund acquisitions ■ There are two main ways that companies can raise money from the public markets: equity and debt ■ Usually, new companies, being relatively unknown, cannot simply sell shares or issue bonds on their owe ■ They usually hire an investment bank to run the issue for them ■ Quick Summary: - The stock and bond markets - The structure and roles of an investment bank - Overview of the Financial Industry 2

3. Overview of the Financial Industry The Equity Market _______________________________________________________________________ What is Stock? A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. Why do corportations issue stock? Corporations raise capital by issuing stocks and entitle the stock owners (shareholders) to partial ownership of the corporation. Stocks are bought and sold on what is called an exchange. There are several types of stocks and the two most typical forms are preferred and common stock. Market capitalization (or market cap) Total value of the issued shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. Capitalization could be used as a proxy for the public opinion of a company's net worth and is a determining factor in some forms of stock valuation. IPO An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are sold to the general public, on a securities exchange, for the first time. Through this process, a private company transforms into a public company. Overview of the Financial Industry 3

4. Overview of the Financial Industry The Equity Market _______________________________________________________________________ The S&P 500, or the Standard & Poor's 500, is a stock market index based on the market capitalizations of 500 large companies whose common stock is publicly traded on the NYSE (The New York Stock Exchange). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments. Overview of the Financial Industry 4

5. Overview of the Financial Industry The Equity Market _______________________________________________________________________ Overview of the Financial Industry 5

6. Overview of the Financial Industry The Bond Market _______________________________________________________________________ ■ What is bond? A bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Key Characteristics Principal: Nominal, principal, par or face amount is the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term. Coupon Interest Payment: Periodic Interest Payment to holder over life of the bond. Maturity Date: Date at which “loan” is repaid The price of a bond: the price the bondholder pays the bond issuer to hold the bond. The sum of the present values of all expected coupon payments plus the present value of the par value at maturity. Overview of the Financial Industry 6

7. Overview of the Financial Industry The Bond Market _______________________________________________________________________ To illustrate how a bond works, let’s look at an 8% coupon, 30-year maturity bond with a par value of $1,000, paying 60 coupon payments of $40 each. Coupon rate = 8% Par value = $1,000 Therefore the coupon = 8% x $1,000 = $80 per year Because this bond is a semiannual coupon, the payments are for $40 every six months. We can also say that the semiannual coupon rate is 4 percent. Since the bond’s time to maturity is 30 years, there are total of 30 x 2 = 60 semiannual payments. At the end of Year 30, the bondholder receives the last semiannual payment of $40 dollars plus the principal of $1,000. Overview of the Financial Industry 7

8. Overview of the Financial Industry The Bond Market _______________________________________________________________________ Overview of the Financial Industry 8

9. Overview of the Financial Industry The Bond Market _______________________________________________________________________ This table shows global bonds to be $157 trillion out of the total $212 trillion of capital stock (bonds plus stocks) with stocks at $54 trillion. That means bonds constitute about 75% of the total capital stock. Overview of the Financial Industry 9

10. Overview of the Financial Industry Summary of the Structure and Functions of an Investment Bank _______________________________________________________________________ ■ Structure: ─Investment Banking Division (IBD) Product Group Industry/ Coverage Group ─Sales & Trading (S&T) Sales/ Broker/ Dealer Trading Research ─Asset Management (AM)/ Investment Management (IM) Private banking Institutional Management ■ Function: ─Investment Banking Division (IBD) M&A Advisory IPOs Underwriting Structure Finance ─Sales & Trading (S&T) Market-making ─Asset Management (AM)/ Investment Management (IM) Private banking Institutional Management Overview of the Financial Industry 10

11. Overview of the Financial Industry Investment Banking _______________________________________________________________________ ■ Introduce the product vs. industry group distinction ─Product Group (M&A, ECM, DCM, Leveraged Finance, Restructuring) ─Industry Group (Aerospace, Healthcare, Retail, Energy, TMT, Transportation) ■ Initial Public Offering (IPO) 1.Initial Pitch 2.Valuation 3.Due Diligence 4.Pitch books/ Sales Force Memo 5.S-1 6.Road Shows 7.IPO Overview of the Financial Industry 11

12. Overview of the Financial Industry Investment Banking _______________________________________________________________________ ■ League Table Overview of the Financial Industry 12

13. Overview of the Financial Industry Investment Banking _______________________________________________________________________ ■ Hierarchy ─Analyst ─Associate/ AVP ─Vice President (VP) ─Executive Director/ Director ─Managing Director ─Global-Head/ Partner ─Executive Officers (CEO, COO, CIO, CRO) Overview of the Financial Industry 13

14. Overview of the Financial Industry Sales and Trading[use multiple slides if necessary] _______________________________________________________________________ ■ Proprietary vs. Flow Trading - Proprietary trading involves making trades with the firms own money; the Volcker Rule, introduced after the crisis, bans investment banks from doing this - Flow trading is the most common type of trading; it involves making trades on behalf of clients, and then hedging ■ Sales vs. Trading - Salespeople and traders have very distinct roles. - Salespeople are the main contacts with banks’ trading clients (e.g. asset managers, hedge funds, etc.) Their role is to suggest possible trades to clients and to maintain relationships with them. - Traders, on the other hand, have less contact with clients. They focus on executing and hedging against trades. ■ Market Making This involves wither matching buyers and sellers in the market (this is the ideal situation) or acting as a source or liquidity or as a counterparty ■ Equities vs. Fixed Income - Equities includes stocks and all derivatives based on stocks (options and futures.) - Fixed Income includes bonds, currencies, commodities, and derivatives Overview of the Financial Industry 14

15. Overview of the Financial Industry Sales and Trading[use multiple slides if necessary] _______________________________________________________________________ Overview of the Financial Industry 15

16. Overview of the Financial Industry Investment Management _______________________________________________________________________ ■ Asset Management ─Institutional investors ─Essentially invest on behalf of clients ─Various types of investment ─Two major divisions Investment management: Research analyst  portfolio manger  trader Client management: client supporting  client manager ■ Wealth Management ─Private investors: HNW (high net worth) individuals (over $1 mm) ─Covers full financial solutions: taxes, asset protection, investment, property advice ─Essentially, the “front office” / “client manager” for many other divisions ─Mostly relationship management (family) ─Non-discretionary Overview of the Financial Industry 16

17. Overview of the Financial Industry The Buy Side vs. the Sell Side _______________________________________________________________________ ■ Can use a table here, with investment banks on the sell side, and some asset managers/ hedge funds/ PE on the buy side. Define these if necessary. ■ List some example companies, PE firms, and funds on each side to get people familiar with some of the big names and people ■ Also describe the career relationship between banks and the buy side (i.e. many people do IB for 2-3 years to move to PE or hedge funds) Overview of the Financial Industry 17

18. Overview of the Financial Industry Front vs. Middle vs. Back Office _______________________________________________________________________ ■ Finance-middle office ─Increase and monitor profitability and efficiency ─Communication and coordination ─Main functions: P/L business performance Audit Company’s accounting Valuations ■ Operations-back office ─Main functions: Trade support Monitoring and reporting Client service ■ Transaction Banking ─Trade and Treasury Solutions ─Securities and Fund Service Overview of the Financial Industry 18