Ch2 Capital market Flashcards
Financial instruments
shares
bonds
derrivatives
commodities
currencies
Five sub-markets
- capital market: shares and bonds
- money market: assets < one year
- derivative market
- commodities market
- currencies market
Capital market
- securities are issued to raise medium- to long-term financing
- market participants trade securities
- securities - ownership in corporations, and creditor relationship in government / corporations
Purpose of capital market
- a conduit for demand and supply of debt and equity
- a secondary market for security holders to exchange them at market prices
Two components of capital market
- stockmarket
- bond market
Within the markets:
1. primary market: transaction only once
2. secondary market: where most transactions take place
3. over-the-count market:usually for small companies not able to meet listing requirements
Money market
- also a part of financial market
- for borrowing and lending short-term (< a year)
- term deposits, treasury bills, and commercial paper
Two kinds of public issues
- cash offer: offered to the public as part of a public offering
- rights offer: offered to existing shareholders in porpotion to their current holdings
Public offering
- Prospectus:
- approval of the prospectus only certifies that all information relevant to eh issue is included in the prospectus and the information is accurate
- the approval doesn’t imply any conclusion regarding the merits of the security or the fairness of the sale price - preliminary prospectus: no price determined, red herring. price is determined prior to the date the shares are available for sale after being consulted with large institutional invetors
- unseasoned offering - IPO / seasoned offering
4.prompt offering prospectus: short-form prospectus
bond indenture
- senior bonds: rank ahead of other lenders in the event of default
- junior or subordinated bonds
- call provision: issuer repay earlier than maturity
- sinking fund provision: issuer deposit money annually with a trustee, ensuring enough cash to pay off bond
- conversion provision: to be converted into shares rather than being repaid in cash
- protective covenants
Private placement
- securities issue is sold to a group of institutional investors such as insurance company, pension plan, mutual fund
- no prospectus is required
- offering memorandum required
- private placement investors are more sophisticated
- majority of bonds and preferred shares are sold through private placement
- the issue sold in a private placement cannot be freely traded in the market
Flotation costs
all the costs incurred to complete a new issue of shares or bonds
disadvantages of private placement
- higher financial cost (low flotation costs)
varieties of underwriting arrangements of cash offering
- bought deal: underwriter syndicate offers to buy all the issue at a guaranteed price - for seasoned offerings of large companies
- regular underwriting: aka firm commitment underwriter takes the risk
- best efforts: issuer takes the risk
- Dutch auction: the price at which the # of shares issued is reached is determined to be the issue price.
each bidder gets % (# of shares issued/# of shares bidded) of shares at the issue price
Other issues
- overallotment option: Green Shoe provision
additional % of shares are given to underwriters at initial agreed price - lockup agreement
underpricing at IPO
Underwriters determine the “right” price of shares to be offered to the market
underpricing is an opportunity cost for the issuer
