ch. 14 - rising capital in the financial markets 2002, prentice hall, inc
TRANSCRIPT
Ch. 14 - 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 FinancingSources
• 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 Notes 75.3%
• Equities 24.7%
Movement of Savings
• Direct Transfer of Funds
Movement of Savings
• Direct Transfer of Funds
saver
Movement of Savings
• Direct Transfer of Funds
saverfirm
Movement of Savings
• Direct Transfer of Funds
cashcash
saverfirm
Movement of Savings
• Direct Transfer of Funds
cashcash
securitiessecurities
saverfirm
Movement of Savings
• Indirect Transfer using Investment Banker
Movement of Savings
• Indirect Transfer using Investment Banker
investmentbanker
Movement of Savings
• Indirect Transfer using Investment Banker
investmentbanker firm
Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
investmentbanker firm
Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
securitiessecurities
investmentbanker firm
Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
securitiessecurities
saver
investmentbanker firm
Movement of Savings
• Indirect Transfer using Investment Banker
fundsfundsfundsfunds
securitiessecurities
saver
investmentbanker firm
Movement of Savings
• Indirect Transfer using Investment Banker
securitiessecurities
fundsfundsfundsfunds
securitiessecurities
saver
investmentbanker firm
Movement of Savings• Indirect Transfer using a Financial Intermediary
Movement of Savings• Indirect Transfer using a Financial Intermediary
financialintermediary
Movement of Savings• Indirect Transfer using a Financial Intermediary
financialintermediary firm
Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
financialintermediary firm
Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
saver
Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
saver
Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
intermediaryintermediarysecuritiessecurities
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financialintermediary 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