Value Of Debt, Preference Shares, And Ordinary Shares Theory Questions

Question 1

Discuss how government bonds are issued within the uk

Answer 1

• inverse relationship between bond prices and interest rates (interest rates up- price of bond down)
• issue bonds in order to raise finance
• via bond auction process (bond will be bought by large banks or financial institutions)

Question 2

Discuss how new shares/equity contracts are issued by corporations

Answer 2

• new shares issued by an initial public offering
• normally issued by smaller, younger companies seeking capital to expand
• in an IPO, the issue may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market
• risk of IPOS is that it is tough for the investor to predict what the stock or shares will do on its initial day of trading and in near future since there is often little data to analyse the company
• Facebook issued 421 million shares valued at $38 from $28 bringing in $16 billion in capital