Ch. 14 - Rising Capital in The Financial Markets  2002, Prentice Hall, Inc.

Slides:



Advertisements
Similar presentations
Chapter 2. The Financial Markets and Interest Rates.
Advertisements

Chapter 14. Primary Markets
CHAPTER 19 INVESTMENT BANKING.
Raising Capital Chapter 15.
Chapter 2. Real and Financial Assets n Real Assets—Tangible assets such as houses, equipment and inventories n Financial Assets—Claims for future payment.
4-1 Business Finance (MGT 232) Lecture Business Finance Introduction Introduction (Financial Environment)
Fundamentals of Corporate Finance, 2/e
Chapter 14 - Raising Capital in the Financial Markets.
ECON305, Maclachlan, Fall 2006 Money & Banking Introduction Chapters 1 & 2 Week 1.
Chapter 2. The Financial Markets and Interest Rates.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Securities Markets CHAPTER 3.
An Overview of Financial Markets and Institutions
> > > > The Financial System Chapter 17. Learning Goals Outline the structure and importance of the financial system. List the various types of securities.
 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus 3-1 Irwin/McGraw-Hill How Securities are Traded Chapter 3.
Financing Process 11/03/05.
© 2004 Pearson Addison-Wesley. All rights reserved 2-1 Function of Financial Markets 1. Allows transfers of funds from person or business without investment.
1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
4 th, 5 TH and 6 th SESSION 1. Financial Markets 2.
3-1 Chapter 3 Financial Intermediaries. 3-2 Deficit Sectors Financial Intermediaries Claims Surplus Sectors $ Claims $$
Ch. 2 - The Financial Markets and Interest Rates  2000, Prentice Hall, Inc.
INVESTMENTS Lecture 2 Security Markets. Security market organization §Markets are meant to allow buyers and sellers to interact. §Good financial markets.
Venture Capital Private financing for relatively new businesses in exchange for stock Usually entails some hands-on guidance The company should have an.
Learning Goals Explain how financial institutions serve as intermediaries between investors and firms. Provide and overview of financial markets. Explain.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Securities Markets CHAPTER 3.
Securities Markets Chapter 4
The Financial System Chapter 16.
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 How Securities Are Traded.
The Canadian Investment Marketplace
Financial Markets and the Investment Banking Process Chapter 3 Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western.
Chapter 2 The Financial Markets and Interest Rates.
LECTURE 3 Practice Questions Chapter 1 Chapter 2.
1 Money and Banking Introduction. Week 1 Learning Goals By the end of the week, you should … Be familiar with the different types of financial instruments.
1 IIS Chapter 14 - Raising Capital in the Financial Markets Chapter 15 – Analysis and Impact of Leverage.
CHAPTER 19 INVESTMENT BANKING. Copyright© 2003 John Wiley and Sons, Inc. Investment Banking Investment Banks (IB) are the most important participant in.
Basic Terminologies of Financial Institutions By: Sajad Ahmad.
Financial Markets & Interest Rates. Financial System Surplus Economic Units Surplus Economic Units Deficit Economic Units Deficit Economic Units.
The Financial Markets and the Investment Banking Process
RECAP LAST LECTURE 5. FINANCIAL SECURITIES & MARKETS DEBENTURE A DEBENTURE ALSO CALLED A NOTE IS AN UNSECURED CORPORATE BOND OR A CORPORATE BOND THAT.
Financial markets Financial institutions Stock Market Efficiency
ALOMAR_212_31 Chapter 2 The Financial System. ALOMAR_212_32 Intermediaries, instruments, and regulations. Financial markets: bond and stock markets Financial.
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 3-1 How Securities Are Traded Chapter 3.
Financial Markets and their functions
1 Securities Markets Chapter 4 Jones, Investments: Analysis and Management.
15- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.
1. 2 Learning Outcomes Chapter 3 Describe the role that financial markets play in improving the standard of living in an economy. Describe how various.
Review for chapter Types of Securities  Treasury Bills and Treasury Bonds  Municipal Bonds  Corporate Bonds  Preferred Stocks  Common Stocks.
Financial Markets Why Study Financial Markets?. Financial markets channel funds from savers to investors, thereby, promoting economic efficiency. Financial.
13-1 Agenda for 5 August (Chapter 15) Raising Capital Early-Stage Financing and Venture Capital Selling Securities to the Public Underwriters Alternative.
McGraw-Hill /Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Services Offered by Securities Firms versus Investment Banks.
The Creation of Financial Assets
Chapter 3 How Securities are Traded. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Primary vs. Secondary Security Sales.
An Overview of the Financial System
PRIMARY VERSUS SECONDARY MARKETS
 Savings – income not used for consumption  Investment – the use of income today that allows for a future benefit  Financial System – all the institutions.
CH#2 Financial Markets and their functions. Terms to know: 1 Classification of Financial Markets: 2 What is Money Market? 3 4 What are Financial Markets?
1 Lecture 2: Financial markets Mishkin chapter 2 – part A Page 23-28,
4-1 Chapter 4 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University.
CHAPTER 3 Investments How Securities Are Traded Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin.
INTRODUCTION TO FINANCIAL MANAGEMENT Chapter 1. WHAT IS FINANCE? Finance can be defined as science and art of managing money. KEYWORDS FINANCIAL MANAGEMENT.
CHAPTER 3 Securities Markets.
How Corporations Issue Securities
How Securities are Traded
How Securities Are Traded
Chapter 4 Jones, Investments: Analysis and Management
Business Finance (MGT 232)
Securities Markets CHAPTER 3.
The Financial Markets Financial markets represent a system that includes individuals and institutions, instruments, and procedures that bring together.
Institutions & Derivative Instruments
COMPONENTS OF FINANCIAL MARKET SYSTEM
Institutions & Derivative Instruments
Presentation transcript:

Ch Rising Capital in The Financial Markets  2002, Prentice Hall, Inc.

Q: What are SECURITIES? A: Financial Assets that Investors purchase hoping to earn a high rate of return.

Types of Securities Treasury Bills and Treasury Bonds Municipal Bonds Corporate Bonds Preferred Stocks Common Stocks Which of these are RISKY? Which promise HIGH RETURNS? Is there a relationship between RISK and RETURN?

Corporate Financing Sources In 1999, over $400 billion in external corporate financing was raised. From 1996 through 1999, capital has been raised through the following sources: Corporate Bonds and Notes75.3% Equities24.7%

Movement of Savings Direct Transfer of Funds

Movement of Savings Direct Transfer of Funds saver

Movement of Savings Direct Transfer of Funds saver firm

Movement of Savings Direct Transfer of Funds cash saver firm

Movement of Savings Direct Transfer of Funds cash securities saver firm

Movement of Savings Indirect Transfer using Investment Banker

Movement of Savings Indirect Transfer using Investment Banker investment banker

Movement of Savings Indirect Transfer using Investment Banker investment banker firm

Movement of Savings Indirect Transfer using Investment Banker funds investment banker firm

Movement of Savings Indirect Transfer using Investment Banker funds securities investment banker firm

Movement of Savings Indirect Transfer using Investment Banker funds securities saver investment banker firm

Movement of Savings Indirect Transfer using Investment Banker fundsfunds securities saver investment banker firm

Movement of Savings Indirect Transfer using Investment Banker securities fundsfunds securities saver investment banker firm

Movement of Savings Indirect Transfer using a Financial Intermediary

Movement of Savings Indirect Transfer using a Financial Intermediary financial intermediary

Movement of Savings Indirect Transfer using a Financial Intermediary financial intermediary firm

Movement of Savings Indirect Transfer using a Financial Intermediary funds financial intermediary firm

Movement of Savings Indirect Transfer using a Financial Intermediary funds firmsecurities financial intermediary firm

Movement of Savings Indirect Transfer using a Financial Intermediary funds firmsecurities financial intermediary firm saver

Movement of Savings Indirect Transfer using a Financial Intermediary fundsfunds firmsecurities financial intermediary firm saver

Movement of Savings Indirect Transfer using a Financial Intermediary funds intermediarysecurities funds firmsecurities financial intermediary firm saver

Financial Market Components Public Offering

Financial Market Components Public Offering –Firm issues securities, which are made available to both individual and institutional investors.

Financial Market Components Public Offering –Firm issues securities, which are made available to both individual and institutional investors. Private Placement

Financial Market Components Public Offering –Firm issues securities, which are made available to both individual and institutional investors. Private Placement –Securities are offered and sold to a limited number of investors.

Financial Market Components Primary Market

Financial Market Components Primary Market –Market in which new issues of a security are sold to initial buyers.

Financial Market Components Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market

Financial Market Components Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market –Market in which previously issued securities are traded.

Financial Market Components Money Market

Financial Market Components Money Market –Market for short-term debt instruments (maturity periods of one year or less).

Financial Market Components Money Market –Market for short-term debt instruments (maturity periods of one year or less). Capital Market

Financial Market Components Money Market –Market for short-term debt instruments (maturity periods of one year or less). Capital Market –Market for long-term securities (maturity greater than one year).

Financial Market Components Organized Exchanges

Financial Market Components Organized Exchanges –Buyers and sellers meet in one central location to conduct trades.

Financial Market Components Organized Exchanges –Buyers and sellers meet in one central location to conduct trades. Over-the-Counter (OTC)

Financial Market Components Organized Exchanges –Buyers and sellers meet in one central location to conduct trades. Over-the-Counter (OTC) –Securities dealers operate at many different locations across the country.

Financial Market Components Organized Exchanges –Buyers and sellers meet in one central location to conduct trades. Over-the-Counter (OTC) –Securities dealers operate at many different locations across the country. –Connected by Nasdaq system (National Association of Securities Dealers Automated Quotation system).

Investment Banking How do investment bankers help firms issue securities? Underwriting the issue. Distributing the issue. Advising the firm.

Distribution Methods Negotiated Purchase

Distribution Methods Negotiated Purchase –Issuing firm selects an investment banker to underwrite the issue.

Distribution Methods Negotiated Purchase –Issuing firm selects an investment banker to underwrite the issue. –The firm and the investment banker negotiate the terms of the offer.

Distribution Methods Negotiated Purchase –Issuing firm selects an investment banker to underwrite the issue. –The firm and the investment banker negotiate the terms of the offer. Competitive Bid

Distribution Methods Negotiated Purchase –Issuing firm selects an investment banker to underwrite the issue. –The firm and the investment banker negotiate the terms of the offer. Competitive Bid –Several investment bankers bid for the right to underwrite the firm’s issue.

Distribution Methods Negotiated Purchase –Issuing firm selects an investment banker to underwrite the issue. –The firm and the investment banker negotiate the terms of the offer. Competitive Bid –Several investment bankers bid for the right to underwrite the firm’s issue. –The firm selects the banker offering the highest price.

Distribution Methods Best Efforts

Distribution Methods Best Efforts –Issue is not underwritten.

Distribution Methods Best Efforts –Issue is not underwritten. –Investment bank attempts to sell the issue for a commission.

Distribution Methods Best Efforts –Issue is not underwritten. –Investment bank attempts to sell the issue for a commission. Privileged Subscription

Distribution Methods Best Efforts –Issue is not underwritten. –Investment bank attempts to sell the issue for a commission. Privileged Subscription –Investment banker helps market the new issue to a select group of investors.

Distribution Methods Best Efforts –Issue is not underwritten. –Investment bank attempts to sell the issue for a commission. Privileged Subscription –Investment banker helps market the new issue to a select group of investors. –Usually targeted to current stockholders, employees, or customers.

Distribution Methods Direct Sale

Distribution Methods Direct Sale –Issuing firm sells the securities directly to the investing public.

Distribution Methods Direct Sale –Issuing firm sells the securities directly to the investing public. –No investment banker is involved.

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What type of issue is this? It’s a negotiated purchase.

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. How many shares will be sold?

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. How many shares will be sold? $100,000,000 / $20 = 5 million new shares of common stock.

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the flotation costs?

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the flotation costs? Underwriting spread: 2% of $100 million = $2 million.

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the flotation costs? Underwriting spread: 2% of $100 million = $2 million. Issuing costs: printing and engraving costs; legal, accounting and trustee fees.

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the risks?

Stock Issue Example: Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the risks? The investment bank accepts the risk of being able to sell the new stock issue for $20 per share. If the stock price falls, the investment bank could lose money.

Regulations: The Primary Market The Securities Act of 1933 Firms register with the Securities Exchange Commission (SEC). SEC has 20 days to review.

Regulations: The Primary Market The Securities Act of 1933 Firms register with the Securities Exchange Commission (SEC). SEC has 20 days to review. –SEC may ask for more information.

Regulations: The Primary Market The Securities Act of 1933 Firms register with the Securities Exchange Commission (SEC). SEC has 20 days to review. –SEC may ask for more information. –The firm cannot solicit buyers during the review period but can advertise.

Regulations: The Secondary Market The Securities Exchange Act of 1934 Established the SEC. Exchanges must register with SEC. Company information must be available to the public. Insider trading is regulated.

Regulations: Recent Developments Securities Acts Amendments of 1975 Created National Market System. Eliminated fixed brokerage commissions. SEC Rule 415 Allows Shelf Registration