Financial Management financial Markets

Readings Financial markets http://www.investopedia.com/walkthrough/corporat e-finance/1/financial-markets.aspx

Financial Markets and Intermediaries Connect buyers and sellers Primary market: issuer to investor Secondary market: investor to investor Increase liquidity Decrease transaction costs Fees Interest rate/dividends Intermediary: “middle man” between direct parties

Securities Financial assets (≠ real assets) A secondary market (investor-to-investor) exists Debt securities = bonds, a form of lending Equity securities = stocks, a form of ownership

Price/Yield Relationship All securities have an inverse price/yield relationship For any given security, The lower the price, the higher the yield The higher the price, the lower the yield Yield formula: yield = income/price

Yield Exercise: Bonds Bond investment terms (determined by issuer) Par value: $1,000 Coupon: 8.00% Annual interest payment: $1,000 x 8% = $80 If the price increases to $1,100, what is the yield? If the yield increases to 8.50%, what is the price?

Yield Exercise: Common Stock Stock investment: Share price: $20.00 EPS: $6.00 Yield: $6/$20 = 30% If the price increases to $24.00, what is the yield? If the yield increases to 40%, what is the price? If EPS increases to $9 and the yield decreases to 20%, what is the price?

Transaction Costs Fee earned by intermediary Common shares example Buy price is $14.75/share, sell price is $14.63/share What is intermediary fee for 10,000 shares? Bonds example Buy yield is 4.78%, sell yield is 4.98% What is intermediary fee for a 5%, $1,000,000 bond?

Yield Exercise: Bonds Solution

Yield Exercise: Common Stock Solution

Transaction Costs Solution