CH 7A

Question 1

What are the two types of maturities?

Answer 1

• Money Markets

- Capital Markets

Question 2

What is Money Markets?

Answer 2

• Where short term debt securities are bought and sold

Question 3

What are Capital Markets? what is an ex of a capital market?

Answer 3

• Where long term debt and equity securities are bought and sold
• All stocks

Question 4

Who gets the money?

Answer 4

• Primary and secondary markets

Question 5

What is a Primary Market? and among who trades these securities?

Answer 5

• Where firms raise capital by issuing new stock shares to thee public
• Trade is between firm and investor

Question 6

What is a Secondary Market? and who trades these securities?

Answer 6

• Where securities are re-traded
• Vast majority of trading is done
• Trade is between investors

Question 7

What are the ways to issue new securities?

Answer 7

• Public Offerings
• Private Placements
• Rights Offering

Question 8

What are the ways firms public offer their securities?

Answer 8

• IPO’s

- Secondary equity offerings

Question 9

What is Secondary equity Offering?

Answer 9

• An existing firm selling new stock shares to raise capital for the firm

Question 10

What is a Private Placement?

Answer 10

• The selling of stock or bond to institutional investors and not the public

Question 11

What is the purpose for the Primary Market?

Answer 11

• Raise Capital for the firm (long term money)

Question 12

What is the purpose for the Secondary Market?

Answer 12

• Provide liquidity to the market

Question 13

What is the procedure for a firm to become an IPO? #1

Answer 13

• The firm gets the existing shareholders’ approval
• Selects underwriter: Investment bank
• SEC approval

Question 14

What does the investment bank do for the firm?

Answer 14

• They advice, Promote and facilitate sale of the new shares

Question 15

What is prospectus?

Answer 15

• Part of the registration filling prior to SEC approval

Question 16

What is Red herring?

Answer 16

• Preliminary prospectus prior to SEC approval

Question 17

What is the procedure for a firm to become an IPO? #2

Answer 17

• Quiet Period
• Road Show
• Once stock is trades publicly, supply and demand determines the price

Question 18

What is a Quiet Period?

Answer 18

• Corporate insiders are forbidden to speak to the public about their business to avoid tipping certain analysts, journalists, investors and portfolio managers to an unfair advantage

Question 19

What is Road Show?

Answer 19

• Presentations to potential investors

Question 20

What do underwriters do with road shows?

Answer 20

• They measure the interest level of the public in the IPO, they might increase the price if people are too interested

Question 21

What is the underwriting process #1

Answer 21

• Lead underwriter
• Syndicate
• Selling Group
• Compensation

Question 22

What is a lead underwriter? and what does it eliminate

Answer 22

• Typically buys the issue at an agreed price

- Eliminates risk to issuing firm

Question 23

What is a syndicate?

Answer 23

• Additional investment bankers brought in by Lead to share financial underwriting risk

Question 24

What is Selling Group?

Answer 24

• Investment banks and brokerage firms responsible for selling a part of the issue

Question 25

What is Compensation

Answer 25

• in the form of a discount to the expected sale price of the new securities

Question 26

What is the underwriting process #2

Answer 26

• tendency to underprice amount paid to issuing firm
• ## IPO’s are risky investments

Question 27

In finance what does it mean the word Spread?

Answer 27

• “The difference Between”

Question 28

Why are IPO’s risky?

Answer 28

• Generally they overperform the 1st day (hype, excitement)

- Statistically speaking most IPO’s under perform the market 3-5 years