1. Unit 12 The Capital Market

2. I. What is the capital market? The capital market refers to a market where encompasses any transaction involving long-term debt with more than a one-year maturity. (The word “capital” infers a long-term commitment on part of the lenders and long-term need for the funds on part of borrowers.)

3. II. Bonds & Notes

4. A bond or note usually refers to a marketable debt instrument with maturity more than one year. Notes have shorter maturities generally a maximum original maturity of 10 years or less, such as US T.N.. Notes and bonds are contracts that stipulate a series of fixed payments from the issuer to the holder. The payments are usually semiannual or once a year, sometimes quarterly. The final payment also the face value of the bond or note. Bonds and notes may be offered by a private company, a local or federal government, a foreign firm of government. Most bonds and notes are marketable. Notes: Most bonds or notes include the following information: (i) The name of the issuer; (ii) Face value (Par value); (iii) The maturity date is the date of final payment; (iv) Coupon rate; (v) Interest payment date; (vi) Trustee (A trust company or large bank.) Bonds need not have a maturity, they may pay a fixed amount per year forever. These bonds are called perpetuities （永续年金）, which have been sold by the government.

5. Treasury Note

6. Municipal Bond

7. Corporation Bond

8. Consolidated Annuities

9. III. Stocks

10. a. All corporate stock represents an ownership interest in a corporation, conferring on the holder a number of important rights as well as risks. There are 2 types of corporate stock: common and preferred stock （普通股和优先股）. b. Common stock represents a residual claim against assets of the issuing firm, entitling the owner to share in the net earnings of the firm when it is profitable and share in the net market value (after all debts are paid) of the company’s assets if it is liquidated （清 算）. By owning common stock, the investor is subject to the full risks of ownership, which means that the business may fail. If a company with outstanding shares of common stock is liquidated, the debts of the firm must be paid to the creditors first from any assets available. Then, the preferred stockholder receive their share of any remaining funds. At last, whatever is left accrues to common stockholder on a pro data basis.

11. Common Stocks

12. Preferred Stocks

13. Chinese Stocks (a)

14. Chinese Stocks (b)

15. Benefits Enjoyed by Common Stockholders Common stockholders can elect the company’s board directors. They have preemptive rights, which give the current shareholders the right to purchase any new stock, convertible bonds or preferred stock issued by the firm in order to maintain a pro rata share of ownership when rationing. Common stockholders may vote on all matters that affect the firm’s important strategies, such as M&A and hiring or dismissal of the senior executives, etc..

16. c. Preferred stock occupies the middle place between debt and common stock, including advantages and disadvantages of both firms of raising long-term funds. Preferred stockholders have a prior claim over the firm’s assets and earning relative to common stockholders. Generally, preferred stockholders have no voice in the selection of management unless the corporation fails to pay dividends for a stipulated period of time. In fact, the bulk of preferred stocks usually have a call provision （赎回条款）.When the interest rates decline, the issuing company may exercise the call privilege by a sinking fund provisions （偿债基金条款） at the price stated in the former formal agreement between the firm and its shareholders. A few preferred stocks are convertible into shares of common stock at the investor’s option.