1. Chapter Nine The Capital Markets

2. Copyright © 2004 Pearson Education Canada Inc. Slide 9–2 Capital Markets Original maturity is greater than one year Best known capital market securities: –Stocks and bonds Primary issuers of securities: –Federal and local governments –Corporations Largest purchasers of securities: –You and me

3. Copyright © 2004 Pearson Education Canada Inc. Slide 9–3 Capital Market Trading 1.Primary market for initial sale (IPO) 2.Secondary market –Over-the-counter –Organized exchanges (i.e., TSX)

4. Copyright © 2004 Pearson Education Canada Inc. Slide 9–4 Want to be listed on the TSX? You will need: 1.At least 300 investors 2.A minimum of 1 million shares traded publicly, with a market value of $4 million 3.Any shareholder with more than 10% of the stock must provide information on their experience in business 4.A Participating Organization of the TSX must sponsor the company

5. Copyright © 2004 Pearson Education Canada Inc. Slide 9–5 Want to be listed on the NYSE? You will need at least: 1.2000 stockholders, each owning at least 100 shares 2.A minimum of 1.1 million shares traded publicly 3.Pretax earnings of $2.5 million at the time of listing 4.$2 million in pretax earning in each of the two prior years 5.A total of $100 million in market value of publicly traded shares

6. Copyright © 2004 Pearson Education Canada Inc. Slide 9–6 Canada Bonds

7. Copyright © 2004 Pearson Education Canada Inc. Slide 9–7 Canada Bond Interest Rates No default risk Very low interest rates

8. Copyright © 2004 Pearson Education Canada Inc. Slide 9–8 Figure 2: Interest Rate on Long-Term Canada Bonds and the Inflation Rate, 1976–2001 Canada Bond Interest Rates

9. Copyright © 2004 Pearson Education Canada Inc. Slide 9–9 Compare Long-Term Canada Bonds to 90-Day Treasury Bills

10. Copyright © 2004 Pearson Education Canada Inc. Slide 9–10 Municipal Bonds 1.Issued by local governments 2.Used to finance public interest projects 3.In the United States tax-free municipal interest rate = taxable interest rate  (1  marginal tax rate) 4.Two types –General obligation bonds –Revenue bonds 5.NOT default-free

11. Copyright © 2004 Pearson Education Canada Inc. Slide 9–11 Corporate Bonds Face value of $1000 Pay interest semi-annually Can be redeemed anytime the issuer wishes Degree of risk varies with each bond Interest rate varies with level of risk

12. Copyright © 2004 Pearson Education Canada Inc. Slide 9–12 Corporate Bond Interest Rates

13. Copyright © 2004 Pearson Education Canada Inc. Slide 9–13 Characteristics of Corporate Bonds Registered Bonds Restrictive Covenants Call Provisions –Higher yield –Sinking fund –Interest of the stockholders –Alternative opportunities Conversion

14. Copyright © 2004 Pearson Education Canada Inc. Slide 9–14 Types of Corporate Bonds Secured Bonds –Mortgage bonds –Equipment trust certificates Unsecured Bonds –Debentures –Subordinated debentures –Variable-rate bonds Junk Bonds

15. Copyright © 2004 Pearson Education Canada Inc. Slide 9–15 Debt Ratings

16. Copyright © 2004 Pearson Education Canada Inc. Slide 9–16 Stock 1.Represents ownership in a firm 2.Earn a return in two ways –Price of the stock rises over time –Dividends are paid to the stockholder 3.Stockholders have claim on all assets 4.Right to vote for directors and on certain issues 5.Two types –Common stock Right to vote Receive dividends –Preferred stock Receive a fixed dividend Do not usually vote

17. Copyright © 2004 Pearson Education Canada Inc. Slide 9–17 S&P/TSX Composite

18. Copyright © 2004 Pearson Education Canada Inc. Slide 9–18 30 Stocks in the Dow Jones Industrial Average

19. Copyright © 2004 Pearson Education Canada Inc. Slide 9–19 Dow Jones Industrial Average, 1990-2002

20. Copyright © 2004 Pearson Education Canada Inc. Slide 9–20 Stock Market Indexes

21. Copyright © 2004 Pearson Education Canada Inc. Slide 9–21 Public Issues of Stocks and Bonds Two principal ways to sell securities to the public –Investment bankers –Private placement