5.1 Financial Markets Flashcards
Money Markets
Capital Markets
- Trade DEBT securities with maturities less than 1 yr ie T-bills Federal AGENCY securities Bankers Acceptances Commercial Paper CD's/Eurodollar CDs Short-Term Tax Exempt Repurchase Agreements
Capital Markets: Stocks and LT Debt Securities
Primary Market v
Secondary Market
Primary is where corps raise New Money (they get funds)
Secondary Markets: Trading previously issued securities
Auction Markets
OTC
eg NYSE > trade at particular sites
Specialists “make the Market” > obligated to buy/sell and have inventory of stock. Their profit margin is the “spread” of buy/sell”
OTC is a Dealer Market: consists of dealer network. Transactions not done on Auction markets. Governing authority NASAQ (more volume but less dollar volume)
Bonds are traded here by Institutional Investors
Financial Intermediaries
FIRMS that CREATE and EXCHANGE securities.
Obtain money from savers, create and exchange securities
-Banks, Life Insurance, Pension Funds, Finance Companies, Investment Bankers, Mutual Funds
Efficient Market Hypothesis
Securities are always in Equilibrium because of the large number of analysts always looking. Impossible to obtain abnormal returns thru fundamental or technical analysis.
Expected return = Return required by marginal investor given risk. And, price equals fair value perceived
Fundamentals: analyzing the company’s Sales, internal developments, industry, general economy. Technical: looking at the historical trades.
Strong Form: All public/private info instantly reflected
Semi-strong form:Private info not reflected
Weak Form: Technical analysis is priced but others may not be
Ratings Agencies
Moodys, Standard & Poore are paid to rate companies expectation of default.
-Ability to pay debt, cash flows, Audited Financial Stmts, type of existing and planned debt, Cash Flow stability
AAA to AA= Best
A- to BBB = Investment Grade (lowest many can buy)
BB and Lower : speculative and junk
CCC-D: high risk of default if not already
Investment Bankers
Intermediaries between business and providers of capital. create New Securities, Brokers in secondary markets, Business Combinations and trade their own accounts
Best Efforts: Do not guarantee sale (Issuer has the risk)
Underwritten: firm commitment to buy all securities.(underwriter has the risk) so form a syndicate to spread risk
Flotation Costs
The costs of issuing the security
Seasoned Security: publicly traded long enough to eliminate short term effects of IPO. Euromarket securities must be traded 40 days to be Seasoned
Underwriting Spread: difference paid by buyers and amt received by company. Company also has direct costs (lawyers, accountants) and indirect costs (Mgt time)
Flotation Higher for Common than Preferred, Higher for Stock versus Bonds
Seasoned Securities
Stock that has been traded long enough to eliminate effects of an IPO. A NEW issue of seasoned securities may cause a price decline because A NEGATIVE SIGNAL, and existing shareholders don’t want to share.
An unseasoned (IPO) tend to be underpriced v aftermarket
Euromarket requires 40 days trading to be SEASONED
IPO
Secondary Offering
Subsequent Offering
non-dilutive v Dilutive secondary offering
Initial Public Offering: 1st issuance to public
Secondary Offering: later issues of same company
Dilutive Secondary Offering: Company issues NEW stock.
Non-Dilutive secondary offering: does not dilute. From founders, execs (existing shareholders)
Subsequent Offering: Stock from treasury
PRO/Con of going public
CCSSS, LEIN
Pro:
Ability to raise new funds,
Establish Firms value in the Market, Increase the LIQUIDITY of the firm’s stock.
Con:
1.Costs of REPORTING REQUIREMENTS
- COMPETITION ACCESS TO COMPANY DATA
- ACCESS OF major shareholders NET WORTH
- Limit on SELF DEALING
- Outside pressure to achieve Earnings
5b. Prices don’t accurately reflect net Worth if conpany - Loss of Control by Management
- Increased Shareholder Servicing Costs
- Stock Price may not reflect True Value of company
Factors to consider when contemplating debt/equity offering
- Amount, Type and Method
- Avoid Fixed Charges? Yes, = no Debt
- Maturity Debt wanted = Debt/ Permanent = Stock
- Concerned about loss of control? > Debt
- cost of underwriting (Common v Preferred, Stock v Debt)
Cash Offer v Rights Offer
Cash = sale of stock (sold to any interested party) rights only to existing shareholders
Stock can be sold either as Cash or Rights.
Rights = sale of Right to Purchase (Warrants given)
Exercise, Sell or let Expire. To existing shareholders
Seasoned Securities can be sold as cash or Rights
Standby Underwriting Arrangement
Underwriter may agree to buy undersubscribed shares (Shares they were unable to sell)
Green Shoe Option
Underwrites can issue additional shares if Strong Demand. Underwriter earns more commissions
