intro to banking/financial markets Flashcards
Seed financing (corporate)
Extremely early-stage financing options for new businesses before they generate self-sustaining cash flows
-Friends/family
-Angel investing
-Crowd sourcing
Development stage (corporate)
Second stage. Start-up and first stage financing to help the company set up operations, take orders, manufacture products. Need working capital
- Venture capitalists
- Bank loans
Growth phase (corporate)
Third stage. Later stage capital and mezzanine provided to a company once it is fully operational to expand
- About to undergo IPO
Acquisitions (corporate)
Larger companies may undertake growth strategies through M&As of other businesses
- Advisory services to determine prospective targets
Capital-raising (IB)
- Debt issuance (Debt capital markets)
- Equity issuance (equity capital markets)
-Loan syndication
Trading (IB)
- Market-making (bid and ask prices of stocks)
- Brokerage (act as intermediary between buyers and sellers)
- ForEx trading
- Derivatives (“bet” aka financial contract on how an asset will perform)
- Clearing house
Advisory (IB)
- M&A
- Restructuring
-Research
-Acquisition financing
Treasury Services (IB)
- Help the financial institutions manage their money
Global payments - Cross- border payments
- E-commerce
Capital Markets vs IB
Capital markets: Buying and selling securities, IB: performing services and advisories for companies
Debt securities (CM)
- Investors are lendors
- Bond markets
-“Fixed income” aka coupon payments, consistent payment dates - Repaid their capital at maturity
Equity securities
- Investors are shareholders
- Stock markets
- Dividends - but not mandatory and risk they don’t get paid
- No payback of initial investment –> hope for capital gains on stock price
Asset management
- Bundles of investments managed on behalf of clients (can be institutional or private)
- Investments include: stocks, bonds, real estate, alternative investments or everything wrapped in one (like mutual fund)
Private wealth management
-Investing
* stocks, bonds, FX, commodities, mutual funds, ETFs, hedge funds, PE funds
- Moving money
* Checking, credit cards, e-commerce, wire transfers
- Saving money
* Checking accounts
* Saving accounts
- Borrowing money
Products/asset classes
Equities, fixed income, forex, commodities/derivatives/alternatives
Equities
Ownership interest in a company
Company pays out dividends
Shareholders have voting rights
Face losses when the company’s rev. Goes down
Future cash flows discounted back to today
Last in line (capital structure)
But no limit to what you’re going to make
Calculating stock prices
Share prices
Price → what you pay, value → what you get
Stock is trading at a certain price, but the value you GET can be higher or lower (undervalued/overvalued) → value is dictated by lots of things
Pricing a share:
- Dividend payments
- Discounted by discount rate
Publicly traded equities – measurements
Comparables: values similar companies relative to each other
EPS: amount of profit for each share of stock
P/E: Market price per share/earnings per share
Fixed income
Nominal/face value
Maturity date
Coupon payments + frequency
Bonds
Pricing a bond
Future cash flows discounted back to today
Coupon payments
Interest rate
Principal repayment
Fixed income terminology
- Bond price: premium, par, discount
- Spread: the difference in yields between two bonds, usually compared against a benchmark (such as government bonds
- Invoice: refers to the total amount due when purchasing bonds, including the bond’s purchase price and any accrued interest
Fixed income investment types
-Money market instruments (bills, CDs)
-Corporate bonds
-Government bonds
-Convertible bonds (can be converted into shares of stock)
- Eurobonds
- Mortgage backed securities
Foreign exchange
Buying and selling of currencies by institutional and retail clients who make money by buying at one rate, selling at another.
Low margin, high volume → not much $ made from each transaction, but LARGE volume of transactions → millions bought at a time
Extremely liquid market
Transaction types:
Spot transactions
Swaps
Derivative products
Forward contracts
Futures
Swaps
Options
Depository institutions/banks/credit unions (buy)
-Want to preserve capital/have liquid assets on hand.
-Low to moderate risk, returns generated from interest income
-High liquidity for customers
- Short time horizon
- Deposits (liabilities)
- Loans, treasuries, agencies (assets)
Insurers (buy)
- Want to match investment portfolios to their liabilities
-Aim for moderate returns, stability - Gain returns on premiums ($ paid by ppl buying insurance)
- Long term time horizon
- Claims (liabilities)
- Policy loans, treasuries, agencies (assets)
Pension funds (buy)
- Match future retirement liabilities –> provide stable payouts to retirees
- Low/moderate risk
=Interest, dividends, capital gains (returns)
-Vested benefits (liabilities)
Hedge funds (buy)
-Pooled investment vehicle
- Only insitutional investors can pool their $
-Aggressive strategies, high risk high reward (100s of thousands of $$$)
Mutual funds (buy)
-Anyone can invest,usually lower risk
- Capital gains (returns)
- Lower fees
- Lower returns
- Fund shares (liabilities)
Trust companies
- Manage $ for families, individuals, institutions
- Trust accounts (liabilities)
- Long term time horizon
Private equity
Investment banking services include: (4)
- Capital raising
- Trading
- Advisory
- Treasury services
Derivative products
Forward contracts, futures, swaps, options
Forward contracts
Contract between two parties fixing the price for a future asset purchase/sale
Futures
Kind of like forward contract but publicly traded/exchanged on the market
Swaps
A derivative contract to allow parties to exchange financial instruments
Option
A contract that gives the right but not the obligation to buy or sell an asset in the future
