1. Ukrainian Academy of Banking of the National Bank of Ukraine Banking Department Banking Lecture 4 Banking in financial market (investment banking) Anna Vladimirovna Buriak, Ph.D., Senior Lecturer at Banking Department

2. Agenda 1. Active vocabulary. 2. Capital market (main features) 3. Securities (main types) 4. Investment banking

3. 1. Active vocabulary  raise capital  raise capital (привлекать капитал)  on their own behalf (за свой счет)  issue securities (выпускать ценные бумаги)  Owe (быть должным, задолжать)  Equity/ bond issues (выпуск акций/облигаций)  IPO (initial public offering) первичное размещение акций  Insure (обеспечивать, страховать)  mergers and acquisitions (M&A) слияния и поглощения

4. 1. Capital market Capital vs. Money markets money marketscapital markets used for the raising of short term finance, sometimes for loans that are expected to be paid back as early as overnight used for the raising of long term finance, such as the purchase of shares, or for loans that are not expected to be fully paid back for at least a year Funds borrowed are typically used for general operating expenses, to cover brief periods of illiquidity. When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods

5. 1. Capital market primary vs. secondary markets primary vs. secondary markets primary markets  new stock or bond issues are sold to investors, often via a mechanism known as underwriting  The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies).  Governments tend to issue only bonds, whereas companies often issue either equity or bonds  The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own behalf secondary markets existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere.

6. 1. Capital market stock vs. bond markets stock vs. bond markets bond markets where investors become creditors stock markets for equity securities, also known as shares, where investors acquire ownership of companies

7. 1. Capital market Size of the global capital markets Size of the global capital markets All figures given are in Billions of US$ and are sourced to the IMF. YearStocksBonds Bank assets Total of stocks, bonds and bank assets World GDP 201362,552.0099,788.80120,421.60282,762.4074,699.30 201252,494.9099,134.20116,956.10268,585.2072,216.40 201147,089.2398,388.10110,378.24255,855.5769,899.22

8. 2. Securities Today, the term securities refers to just about any financial instrument, such as a stock, bond, options contract, or shares of mutual funds. Securities market = capital market and securities = investments Equity Securities, which refers to common stocks Debt Securities, also called fixed income securities Derivative Securities, which refers to various forms of options contracts When a business takes on additional owners to grow, it can either find private investors, or it can go to the capital markets and issue securities in the form of publicly traded stock. When you buy a stock, you become an owner of the company, and as the company makes a profit, you will participate in that profit in one of two ways. Either the company will pay a dividend, which you will receive, or they will use their profits to further grow the business, and, if all goes well, you should subsequently see your stock rise in value. The business goes to the capital markets and issue a debt security which is called a bond. When you buy a bond, you are lending your money to a company, they owe it back to you. They must also pay you interest you own the right to trade other financial securities at pre-agreed upon terms. Options contracts are a form of a derivative security. They give you the right to buy or sell shares of an existing security at a specific price, by a specified date in the future.

9. 2. Securities How Do Securities Get Issued How Do Securities Get Issued Through the Capital Markets? When we say a business must go to the capital markets, what does that mean? It means the business hires an investment banking firm who  looks at the financials of the business and the total amount of money the business needs to raise;  then advises the business on the best way to raise that money (by issuing stock or bonds)  then helps put together and sell a public offering of the securities whereby the newly issued stocks and bonds (securities) are offered to public investors through a network of brokerage firms.

10. 3. Investment banking investment bank is a special type of financial institution that works primarily by helping company access the capital markets (stock market and bond market, for instance) to raise money for expansion or other needs; Main types of investment banking activities:  Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock that can be placed with sophisticated investors such as insurance companies or banks)  Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion)  Insure bonds or launching new products (e.g., such as credit default swaps)  assist companies involved in mergers and acquisitions (M&A) - advise buyers and sellers on business valuation, negotiation, pricing and structuring of transactions, as well as procedure and implementation.  Sales & Trading and Equity Research. Banks match up buyers and sellers as well as buy and sell securities out of their own account to facilitate the trading of securities

11. 3. Investment banking Types of investment banking activities:  The two main lines of business in investment banking are called the sell side and the buy side.  The "sell side" involves trading securities for cash or for other securities (e.g. facilitating transactions, market-making), or the promotion of securities (e.g. underwriting, research, etc.).  The "buy side" involves the provision of advice to institutions concerned with buying investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, and hedge funds are the most common types of buy side entities.

12. 3. Investment banking Organizational structure:  Investment banking consists of front office, middle office, and back office activities.  While large service investment banks offer all lines of business, both "sell side" and "buy side", smaller sell-side investment firms such as boutique investment banks and small broker-dealers focus on investment banking and sales/trading/research, respectively.  A boutique investment bank is a non-full service investment bank that specializes in some aspect of investment banking. Due to their smaller size, capital raising engagements are usually done on a best-efforts basis.

13. 3. Investment banking Front office is generally described as a revenue generating role. There are two main areas within front office, i.e. Investment Banking (involves advising the world's largest organisations on mergers, acquisitions, as well as a wide array of fund raising strategies - corporate finance) and Markets (is divided into sales, trading, some research and also structuring). On behalf of the bank and its clients, a large investment bank's primary function is buying and selling products. The securities research division reviews companies and writes reports about their prospects

14. 3. Investment banking Middle Office Investment Bank Services include compliance with government regulations and restrictions for professional clients such as banks, insurance companies, finance divisions, etc. It also includes capital flows. These are the people that watch money coming into and out of the firm to determine the amount of liquidity the company needs to keep on hand so that it doesn't get into financial trouble. The team in charge of capital flows can use that information to restrict trades by reducing the buying / trading power available for other divisions. This area of the bank includes treasury management internal controls Risk management responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring analyzes the capital flows of the firm, In the United States and United Kingdom financial controller is a senior position, often reporting to the chief financial officer. involves analyzing the market and credit risk that an investment bank or its clients take onto their balance sheet during transactions or trades.

15. 3. Investment banking Back Office Investment Bank Services: It handles things such as trade confirmations, ensuring that the correct securities are bought, sold, and settled for the correct amounts, the software and technology platforms that allow traders to do their job are state-of-the-art and functional, the creation of new trading algorithms, and more. This involves data-checking trades that have been conducted, ensuring that they are not wrong, and transacting the required transfers. Many banks have outsourced operations.

16. 3. Investment banking Questions for discussion 1. The History of Investment Banking 2. Hierarchy and Compensation