Minerals CH 2 Prentice Hall p. 47-54 CH 2 Prentice Hall p. 47-54.
Ch. 14 - Rising Capital in The Financial Markets 2002, Prentice Hall, Inc.
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Transcript of Ch. 14 - Rising Capital in The Financial Markets 2002, Prentice Hall, Inc.
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Ch. 14 - Rising Capital in The Financial Markets
2002, Prentice Hall, Inc.
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Q: What are SECURITIES?
A: Financial Assets that Investors purchase hoping to
earn a high rate of return.
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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?
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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%
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Movement of Savings
• Direct Transfer of Funds
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Movement of Savings
• Direct Transfer of Funds
saver
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Movement of Savings
• Direct Transfer of Funds
saverfirm
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Movement of Savings
• Direct Transfer of Funds
cashcash
saverfirm
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Movement of Savings
• Direct Transfer of Funds
cashcash
securitiessecurities
saverfirm
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Movement of Savings
• Indirect Transfer using Investment Banker
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Movement of Savings
• Indirect Transfer using Investment Banker
investmentbanker
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Movement of Savings
• Indirect Transfer using Investment Banker
investmentbanker firm
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Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
investmentbanker firm
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Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
securitiessecurities
investmentbanker firm
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Movement of Savings
• Indirect Transfer using Investment Banker
fundsfunds
securitiessecurities
saver
investmentbanker firm
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Movement of Savings
• Indirect Transfer using Investment Banker
fundsfundsfundsfunds
securitiessecurities
saver
investmentbanker firm
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Movement of Savings
• Indirect Transfer using Investment Banker
securitiessecurities
fundsfundsfundsfunds
securitiessecurities
saver
investmentbanker firm
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Movement of Savings• Indirect Transfer using a Financial Intermediary
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Movement of Savings• Indirect Transfer using a Financial Intermediary
financialintermediary
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Movement of Savings• Indirect Transfer using a Financial Intermediary
financialintermediary firm
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Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
financialintermediary firm
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Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
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Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
saver
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Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
saver
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Movement of Savings• Indirect Transfer using a Financial Intermediary
fundsfunds
intermediaryintermediarysecuritiessecurities
fundsfunds
firmfirmsecuritiessecurities
financialintermediary firm
saver
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Financial Market Components
• Public Offering
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Financial Market Components
• Public Offering– Firm issues securities, which are
made available to both individual and institutional investors.
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Financial Market Components
• Public Offering– Firm issues securities, which are
made available to both individual and institutional investors.
• Private Placement
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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.
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Financial Market Components
• Primary Market
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Financial Market Components
• Primary Market–Market in which new issues of a
security are sold to initial buyers.
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Financial Market Components
• Primary Market–Market in which new issues of a
security are sold to initial buyers.
• Secondary Market
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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.
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Financial Market Components
• Money Market
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Financial Market Components
• Money Market–Market for short-term debt
instruments (maturity periods of one year or less).
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Financial Market Components
• Money Market–Market for short-term debt
instruments (maturity periods of one year or less).
• Capital Market
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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).
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Financial Market Components
• Organized Exchanges
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Financial Market Components
• Organized Exchanges– Buyers and sellers meet in one central
location to conduct trades.
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Financial Market Components
• Organized Exchanges– Buyers and sellers meet in one central
location to conduct trades.
• Over-the-Counter (OTC)
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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.
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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).
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Investment Banking
How do investment bankers help firms issue securities?
Underwriting the issue.
Distributing the issue.
Advising the firm.
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Distribution Methods
• Negotiated Purchase
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Distribution Methods
• Negotiated Purchase
– Issuing firm selects an investment banker to underwrite the issue.
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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.
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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
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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.
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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.
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Distribution Methods
• Best Efforts
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Distribution Methods
• Best Efforts
– Issue is not underwritten.
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Distribution Methods
• Best Efforts
– Issue is not underwritten.
– Investment bank attempts to sell the issue for a commission.
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Distribution Methods
• Best Efforts
– Issue is not underwritten.
– Investment bank attempts to sell the issue for a commission.
• Privileged Subscription
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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.
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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.
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Distribution Methods
• Direct Sale
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Distribution Methods
• Direct Sale
– Issuing firm sells the securities directly to the investing public.
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Distribution Methods
• Direct Sale
– Issuing firm sells the securities directly to the investing public.
–No investment banker is involved.
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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.
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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?
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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.
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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?
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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.
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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.
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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?
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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.
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Regulations:The Primary Market
The Securities Act of 1933
• Firms register with the Securities Exchange Commission (SEC).
• SEC has 20 days to review.
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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.
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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.
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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.
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Regulations:Recent Developments
Securities Acts Amendments of 1975
• Created National Market System.
• Eliminated fixed brokerage commissions.
SEC Rule 415
• Allows Shelf Registration