Chapter 9 Flashcards
Chapter 9 focuses on long term financing and mainly through
Capital Markets
Loan contracts or promises made by a firm indicating scheduled repayment of the principle amounts with interest or coupon payments typically paid every 6 months
Bonds
Bond investors
Bondholders
Once bonds are issued they can be traded here
Securities Markets
Bond prices move inversely to these
Yields
Feature requires the firm to repurchase a portion of its bonds on a regular basis or set aside an equivalent amount
Sinking Fund
While most bonds have a fixed rate of coupons some have variable rate tied to the prime rate or what?
LIBOR
Also called a redeemable bond that a firm can choose to pay back the investor at a prescribed date prior to maturity date
Callable
Help assess the perceived riskiness of a bond investment and possibility of default
Credit Rating Agencies
The bonds are investment grade and worth the risk
BBB or Above
These are junk bonds with speculative (high yield) ratings are below this point and riskier
BBB
Hybrid securities with a mix of bond and stock features and typically perpetual ones pay regular dividends but have no maturity date so for immediate payout you need to sell
Preferred Shares
Whereby any missed regular dividend payments must be accumulated and paid before any common dividends can be paid
Cumulative Features of Preferred Shares
Net income available to common shareholders after preferred shares
NIAC
For investors preferred shares tend to increase when what rates decline (unless a firm is in financial distress)
Interest
The ultimate owners of the firm or the residual claimants
Common Shares
Any earnings (after the payment to other stakeholders including bonds and preferred shareholders) may be paid as dividends or reinvested depending on this policy
Dividend Payout Policy
Common Shareholder voting rights show up in the elected what?
Board of Governors
Returns to common shareholders can be measured as geometric or arithmetic and are considered what?
Historical Returns
( Final Value / Initial Value ) ^ (1/n)
- 1
Geometric Returns
Sum of ( return / n )
Arithmetic Returns
The two ways to segment capital markets are what and what?
Public and Private
Capital Markets
PUBLIC
1 Domestic 2 Cross-Listing 3 Organized Exchange 4 Over the Counter
A initial Public Offerings B Seasoned Equity Offerings
Seasoned Equity Offerings divide into shelf offering and rights offering
PRIVATE
1 Angel Investors 2 Venture Capital Firms
Overview of Capital Markets
Involves the purchase of a large block of securities by a large institutional investor this is both more common with debt issues and much quicker and less expensive than a public offering
Private Placement
Securities are offered to both large institutional investors and smaller “retail” investors which is most common with equities and often takes 6+ months and is more expensive and results in wider bond holder or stockholder bases
Public Offfering
Funding in early stages often come from these individuals who buy stakes in small private firms even given the risk
Angel Investors
A company in the early sates may rely on these entities organized as a limited partnership with a venture capitalist as the general partner and various institutional investors
Venture Capital Firm
These agencies invest in venture capital, leveraged buyouts and “distressed” firms
Private Equity Firms
When a private firm makes its equity a viable to the public in order to grow and have increased public awareness and the initial owners have a liquid market to sell their stock however the shareholders can be very diverse and the firm is accountable and must manage their time
Initial Public Offering
- approval by the board
- selection of the lead underwriter
- prospectus is filed
- underwriter and management conduct a “road show”
- the underwriter “builds the book”
- the IPO price is determined
IPO Process
Firm Commitment, Best Efforts, Auctions
Types of IPOs
IPOs tend to go thru hot and cold waves and investors who receive shares as part of an IPO and tend to experience high returns on the first day of ownership. Over the first 3 to 5 years following their issuance, IPOs tend to underperform relative to the market
IPO Stylized Facts
If a firm that is already public decides to issue additional common shares the process is known as
Seasoned Equity Offering
Two types of of IPOs
Shelf Offerings and Rights Offerings
The type of IPO that allows issuance without a new prospectus
Shelf Offerings
The IPOs that are only available to existing shareholders
Rights Offerings
Stock prices tend to decrease upon the announcement of an SEO since existing shareholders are concerned about “dilution” of profits
Stylized Fact about IPOs
Large firms, particularly multinationals, may raise capital outside of their domestic markets by what-ing their shares on other exchanges
Cross-Listing
Non-US firms may list on US exchanges through this or negotiable certificates issued by certain US commercial banks that represent an equivalent amount of the foreign securities
American Depositary Receipts (ADRs)
