Chapter 2 Flashcards
capital market
all the financial institutions that help a business raise long-term capital
3 ways that savings can be transferred through the financial markets to those in needs of funds
- Direct transfer of funds
- Indirect transfer using the investment banker
- Indirect transfer using the financial intermediary
venture capitalist
an investment firm (or individual) that provides money to business start ups
saving deficit
those who need money
saving surplus
those who have money (spend less than they take in)
Indirect transfer using an investment-banking firm
investment banker frequently works together with other investment bankers in what is called a syndicate, the syndicate will buy the entire issues of securities from the firm and then sell them to the public for a higher place
Indirect transfer using the financial intermediary
the financial intermediary collects the savings of individuals and issues its own securities in exchange for these savings, then uses the funds collected from the savers to get the businesses securities
direct transfer of funds
firm seeking cash sells directly to investors (savers)
public offering
individuals and institutional investors have the opportunity to purchase the securities
private placement
securities are offered and sold directly to a limited number of investors
venture capital firm
first raises money from institutional investors and high net worth individuals, to pool the funds and invest in startups and early stage companies that have a high return potential but are also very risky
primary market
a market in which new securities are traded
initial public offering IPO
the first time a company issues its stocks to the public
seasoned equity offering SEO
the sale of additional stock by a company whose shares are already publicly traded
secondary market
where currently outstanding securities are traded (everything after initial purchase in primary market is in the secondary market)
money market
borrowing and lending in the short term (days to under a year); telephone or computer market
cash markets or spot markets
where come thing sells today, right now, on the spot
future markets
where you can buy or sell something at a future date
organised security exchanges
(building) financial instruments are traded on their premises
over the counter markets
all security markets except the organised exchanges
underwriting
assuming a risk
underwriters spread
difference between the price the corporation gets and the public offering price
private debt placements
the sale of securities to a relatively small number of select investors as a way of raising capital
advantages with private placements
- Speed - funds come faster
- reduced costs
- financing flexibility - may borrow as needed and pay interest only on amount borrowed
disadvantages with private placements
- interest costs: normally exceed those of public issues
- restrictive covenants (agreements)
- the possibility of future SEC registration
opportunity cost of funds
the next best rate of return available to the investor for a given level of risk
maturity premium
the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes
liquidity premium
the additional return required by investors in securities that cannot be quickly converted into cash
real risk-free interest rate
the required rate of return on a fixed income security that has no risk
nominal rate of interest
tells you how much more money you will have
term structure of interest rates
the relationship between interest rates and the term to maturity
yield to maturity
the rate of return a bondholder will receive if the bond is held to maturity
the unbiased expectations theory
the shaped of term structure of interest rates is determined by an investors expectations about future interest rates
the liquidity preference theory
the shape of the term structure of interest rates is determined by an investors additional required interest rate in compensation of additional risks
market segmentation theory
no relationship between long and short term interest rates
