FI 2 Capital Markets

Question 1

What are capital markets?

Answer 1

Financial markets in which securities are issued to raise medium-to-long term financing

Question 2

Purpose of capital markets

Answer 2

• channel money provided by savers and depository institutions to borrowers and investees through sale and purchase of securities
• provide a secondary market where holders can exchange them at market prices

Question 3

Two components of capital markets

Answer 3

Stock and bond

Question 4

What is the primary market?

Answer 4

Where shares and bonds are initially issued. Can only be sold once.

Question 5

What is the secondary market?

Answer 5

Shares sold between investors - creates liquidity. unlimited sales.

Question 6

What is the OTC market?

Answer 6

Securities that are not traded on an exchange can be bought and sold, usually by dealers. Generally, the type of shares are for companies that are not listed.

Question 7

What is money market used for?

Answer 7

Short-term borrowing, usually for operatiional needs

Question 8

Steps to issuing new securities

Answer 8

1. board approves.
2. hite underwriter
3. offering memorandum issued (if private placement)
4. for IPO, compan decides on method of issue
5. if cash offer being made, company decides on type of underwriting agreement
6. prepare and finalize documents, including the prospectus
7. underwriter advise on final offer price.

Question 9

Ordering of bonds

Answer 9

Senior first, then junior or subordinated in event of default

Question 10

Define private placement. Is a prospectus required?

Answer 10

securities sold to group of institutional investors such as insurance, pension plan etc. No prospectus required.

Question 11

Private placements +/-

Answer 11

+ flotation costs less
+ finalized quicker than IPO
+ more flixebility
+ easier to change terms
- higher financial costs, due to higher demands on returns
- investor may demand more input with the company
- covenants likely to be demanded

Question 12

3 types of fees underwrites charge

Answer 12

management
underwriting
selling

Question 13

Bought deal underwriting arrangement

Answer 13

invetment bank buys shares for fixed price, hoping to sell them for higher

Question 14

Firm commitment

Answer 14

underwriter buys shares then resells them at purhcase price plus underwriting spread

Question 15

best efforts

Answer 15

underwriter makes best efforts to sell shares, but no commitment is made

Question 16

dutch auction

Answer 16

auction held for shares. final bid price is whenever the accumulated quantity of shares goes over the issue price

Question 17

What is overallotment/green shoe provision?

Answer 17

underwriter can sell excess shares within a certain time period after initial trade date for profit

Question 18

define lockup period

Answer 18

a period of time in which insiders cannot sell their shares on open market to not flood them

Question 19

define intrinsic value

Answer 19

PV of all expceted future cash flows. in an efficient market, this is what the share price should be

Question 20

weak vs semi-strong vs strong market efficiency

Answer 20

weak = implies that prices of securities already reflect all past info that has implications of their value
semi-strong = prices reflect all publicly available information, past and present. Only insiders can earn a profit using a buy-and-hold strategy.
strong = a market where all securities prices quickly reflect all info available.