Security_Analysis 超级赞的资料.doc

Seminar 11.Explain the major features of short-selling and discuss the possible implicating of short-selling bans on stock prices and investors. “In finance, short selling or shorting is a way to profit from the decline in price of a security, such as a stock, bond.” (Hedge Fund Data, 2013) A short sale is the sale of stock that you do not own with the intent of purchasing it back later at a lower price. There are many risks in short-selling. First of all, the loss can be infinite. Secondly,shorting stock involves using borrowed money. Thirdly, Short squeezes can wring the profit out of your investment. Moreover, even if youre right, it could be at the wrong time.To control the volatility of the market, stabilize equities market price, and to strengthen investor confidence, many countries choose to ban short-selling. For example, in 18 Sep- 8 Oct 2008 (US) SEC halt short selling in 799 financial institutions and in 23 Jul 2012- 31Jan 2013 Spains market regulator banned short selling of the stocks. Such bans will have influences on both stock prices and the investors.Some scholars believe that the short-selling bans will cause overpricing in stock prices. Miller (1977) earliest indicates that, if the investors have different views on future trend of stock prices, the high costs of the short-selling ban will result in overpricing. Bearish investors cant do the short-selling under the ban and the stock prices only reflect the expectations of optimistic investors. Therefore, Harrison and Kreps (1978) consider that the prices under bans will be higher than the prices without bans. Moreover, Chang et al. (2007) believe that the more significant on investors heterogeneous expectations the more significant overpricing.However, By testing, Jarrow (1980) finds that the short-selling bans can not result in overpricing issue. Diamond and Verrecchia (1987) argue that the risk-neutral investors realize the bans and then adjusting their expectations of future stock prices under a rational market assumption. With the same assumption, Bai et al. (2006) consider the stock prices could be increased or decreased if the investors are risk-averse.As for the investors, Short-selling bans moderate the trading activity of informed traders who have negative information about fundamentals. (Diamond and Verrecchia 1987) Deteriorated the market liquidity significantly. Meanwhile, the bans slowed function of price discovery, which is more significant in bear markets than in bull markets (Beder and Pagano 2013). Thirdly, such bans slowed or prevented the flow of information. As a result, the markets or participants become less informative. At last, the bans damaged the function of risk pooling and sharing in financial market and destroyed the function of optimal allocation of risky-assets in financial marketEssential reading : Alessandro Beber and Marco Pagano (2012), Short-Selling Bans around the World: Evidence from the 2007-2009 Crisis,Journal of Finance, forthcoming.2.Outline the major features of prominent financial instruments used in financial (money and capital) markets.Financial markets generally divided in two parts, money market and capital market. Money market always means that Short term borrowing ( 1 year), high liquidity, Low credit risk, often trade in large denominations, and it is Sub-sector of the Fixed Income Market. Capital market divided into Bond, Equity, and Derivative Market. They are long term borrowing, containing riskier securities.Money market instruments give businesses, financial institutions and governments a way to finance their short-term cash requirements. The main financial instruments in money market include Treasury Bills (T-Bills), Certificates of Deposit (CD), Commercial Paper, Bankers Acceptances, Repos and Reverses, and LIBOR Market. The features of the instruments above are as follows.Treasury Bills: Issued by the government to finance deficit Most marketable and therefore highly liquid Issued at discount from the stated maturity (face) value Very low risk No Coupon Maturity of 28, 91 or 182 days Income earned on T-Bills is exempted from taxes Sold at low transaction cost with no price riskCertificates of Deposit (CD) Maturity 1 month to 5 years Time deposit with a bank Fixed maturity and may not be withdrawn Highly marketable and can be sold to other investors Transferable if owner needs cashCommercial Paper (similar to T-Bill) Maturity up to 270 days Short term and unsecured (not backed by assets) debt notes issued by large companies Used for funding by the company to invest in other assets Not registered with the SEC (low administration costs) Interest rates fluctuates with market conditionBankers Acceptances (typically within 6 months): Order to bank by a banks customer to pay a sum of money in future date within 6 months Very safe due to guarantee by the bank Sold at discount Trade in secondary market Frequently used in international tradeRepos and Reverses Used for short term (mainly overnight or up to two days) borrowing Dealer sells gov.securities to an investor with an agreement to buy back those securities the next day at a slightly higher price Reverse Repo is opposite of repo. The dealer finds an investor holding government securities and purchases them with an agreement to resell them on a future date for a higher price Very safe in term of credit riskLIBOR Market The London Interbank Offer Rate (LIBOR) is the rate at which large banks in London are willing to lend money to other banks It is the premier short-term interest rate quoted in the European money market and serves as a reference rate for a wide range of transactions. Libor rates: calculated for ten currencies and 15 borrowing periods varying from overnight to one year and published daily by a board of influential banksCapital Market instruments often with maturities of more than one year. Bond and fixed income market: Long term borrowing: 1 year to 30 years Coupon (with interest) or Zero Coupon Bonds (sold at discount) Treasury Notes/Bonds: issued by government; semi-annual interest payments Municipal Bonds : issued by state and local; interest is exempt from federal income taxation Corporate Bonds: Private firms borrow money from the public; semi-annual coupons and return face-value to bondholder but have a higher default riskEquity market:Stocks represent partial ownership in a publicly held Corporation and are traded/listed on a stock exchange May produce higher returns but are more risky No maturity and no fixed incomeOrdinary Share Residual Claim May receive Dividends Voting rights Limited liabilityPreference Shares no voting power generally paying a fixed dividend lower priority than bondsDerivative market: The value is derived from the value of an underlying (e.g. stocks, commodities) A derivative is an predefined agreement between two parties: Price, amount and expiration date Hedgers, Speculators, Arbitrageurs Options a right to buy an asset (call) a right to sell an asset (put)Forwards an obligation to buy (long) an obligation to sell (short) traded over-the-counterFutures standardized Forwards listed/traded on an exchangeConclusion:Money markets are a good place to “park” funds that are needed in a shorter time period (1 year or less). Capital markets are risky markets and are not usually used to invest short-term funds and also capital market instead of having higher risk also offer higher return in comparison to money market securities.3:Discuss the main functions of investment bank during the IPO process Definition: Initial public offerings or IPOs, are stocks issued by a formerly privately owned company that is going public, that is, selling stock to the public for the first time. IPO Process:n Select IBs: Investment Banks (IB) is a financial intermediary that performs a variety of services. An investment bank can advise it and perform underwriting functions in connection with the issue. Investment bankers advise the firm regarding the terms on which it should attempt to sell the securities.The selection process is a two-way selection.n Develop & File Prospectus: IBs initiate research about the company and then develop and file the prospectus (registration statement) to SEC. A preliminary registration statement must be filed with the Securities and Exchange Commission (SEC), describing the issue and the prospects of the company. This preliminary prospectus is known as a red herring because it includes a statement printed in red stating that the company is not attempting to sell the security before the registration is approved. When the statement is in final form and accepted by the SEC, it is called the prospectus. At this point, the price at which the securities will be offered to the public is announced.n Road Show: Once the SEC has commented on the registration statement and a preliminary prospectus has been distributed to interested investors, the investment bankers organize road shows in which they travel around the country to publicize the imminent offering. These road shows serve two purposes. First, they generate interest among potential investors and provide information about the offering. Second, they provide information to the issuing firm and its underwriters about the price at which they will be able to market the securities.n Establish offer price and number of shares & Issuing: Large investors communicate their interest in purchasing shares of the IPO to the underwriters; these indications of interest are called a book and the process of polling potential investors is called book building. These indications of interest provide valuable information to the issuing firm because institutional investors often will have useful insights about the market demand for the security as well as the prospects of the firm and its competitors. Investment bankers frequently revise both their initial estimates of the offering price of a security and the number of shares offered based on feedback from the investing community. The firm and the lead underwriter meet to discuss two final (and very important) details: the offer price and the exact number of shares to be sold. Then, issue the shares to investors. If the offer price is too high, the investment bank will fail to sell all of the new issue. If the offer price is too low, the new issue will quickly sell out, however, the company will not reap any of this extra money.n Stabilization, recommend & make a market: After-market support is activities by an underwriter to support the offering price of a new issue stock in the aftermarket. Once the issue is brought to market, the underwriter has several additional activities to complete: stabilize the price if order imbalances arise; guarantee the liquidity to investor; the provision of analyst recommendations; make a market in the stock. Roles: With best efforts underwriting, investment bankers act as agents on a fee basis related to their success in placing the issue with investors. In firm commitment underwriting, the investment banker acts as a principal, purchasing the securities from the issuer at one price and seeking to place them with public investors at a slightly higher price. Finally, in addition to investment banking operations in the corporate securities markets, the investment banker may participate as an underwriter (primary dealer) in government, municipal, and mortgage-backed securities.n Benefits of the role in investment banksq Financial advisors: provide professional advice q Global coordinators: minimize information asymmetry lower costsq Lead underwriter: certificate issuance by its reputation pricingq Market makers: support the aftermarket Advantages of IPOS using investment banksn Underwriting. This is the insurance function of bearing the risk of adverse price fluctuations during the period in which a new issue of securities is being distributed. Underwriters left with unmarketable securities are forced to sell them at a loss on the secondary market. Therefore, the investment banker bears price risk for an underwritten issue.n Distribution. Another related function is the ability of investment banks to reach as many investors as possible.n Advice and counsel. The experience and expertise of the investment bank in issuing shares before and its ability to advice the management, such as pricing services, recommendations and other ancillary services Disadvantages of IPOs by using investment banksn High cost of money and time. There is a spread between what the underwriters buy the stock from the issuing corporation for and the price at which the shares are offered to the public.n No guarantee for successn Under-pricing of the shares and over-valuation of the company. If a firm wishes to get a large allocation when it is optimistic about the security, it needs to reveal its optimism. In turn, the underwriter needs to offer the security at a bargain price to these investors to induce them to participate in book-building and share their information. Thus, IPOs commonly are underpriced compared to the price at which they could be marketed. Such underpricing is reflected in price jumps that occur on the date when the shares are first traded in public security markets.n Double identities. The dilemma between an underwriter and an issuers agent will result in underpriced IPOs or overpriced IPOs and then abnormally high first day returns of IPOs and poor long-term performances of IPOs n Moral hazards. They often use own reputation to make false certification and then may result in poor quality of IPOs and lower the efficiency of IPOs market and harm the interest of other players. Solutions:n Greater the reputation of investment bank, the more effective it is in reducing impact of asymmetric information in equity markets (Chemmanur,1994).n Investment Bank market share is enhanced when neither clientele, issuers nor investors, are harmed by the pricing of past deals (Dunbar, 2000).n If Investment Banks diverge from the underpricing equilibrium, they will lose market shares, e.g. underprice too little, lose potential investors; underprice too much, lose issuers (Randolph, 1986). 4:Compare and contrasts the major features of unit trusts and investment trusts and comment on the services that these trusts can offer to an investor.Unit trusts Unit trusts are collective investment vehicle created under trust. They are open-ended. The trust pools the money of numerous individual investors to create a portfolio of financial securities (the fund) with a specific investment objective - income, growth, or a blend of the two.Unit trusts were first offered to the UK public in 1931 by the M&G Group under a deed that allowed little variation in investment policy. There are over 2,000 different unit trusts available to investors in the UK, investing in over 30 sectors.Features: Open-end fund: An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. It means units fund can sell new units to investors and redeem outstanding units on demand at net asset value. Borrowing: Can borrow up to 10% of the total fund value. Borrowing is usually done for the purpose of managing cash flows rather than to increase the firms investment exposure. Price: The price of each unit depends on the net asset value (NAV) of the funds underlying investments. Each unit is priced once per day. Basically, the value of the unit that an investor buys each day reflects the value of the underlying asset. Taxation: Investors are liable for income tax on dividends, and Capital Gains Tax on realized gains.Investment trustsAn Investment Trust is constituted as a public limited company in its own right and is listed on the London Stock Exchange. As such, it has an independent board that protects shareholders interests and appoints the investment management company. Investors buy shares in the company. An Investment Trust does not make or sell physical goods. They are close-ended medium-to-long term investmentsFeatures: Close-ended Funds: A a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. Gearing: Investment trusts are permitted to borrow money and invest the proceeds. This makes investment trusts high-risk financial instruments, compared to unit trustsUnit TrustsInvestment TrustsTypes of Companies Not Quoted CompaniesQuoted CompaniesType of FundsOpen-endedClose-endedBorrowing CapabilitiesA Unit Trust can borrow ONLY up to 10% of the fund.An Investment Trust can borrow extensively, through an operation called gearingPrice of UnitsPrice is based on NAVCan be traded at a discount to NAVTaxationInvestors are liable for both income taxes on dividends and capital gains taxes.Investors are NOT liable for CGTInitial ChargesInitial Charge is up to 5.25%.No Initial Charges.Management ChargesManagement charges tend to be 1.5%Management charges tend to be under 1%Commission ChargesCommission chargedNo Commission charged Prices: Just like individual company shares, the shares of ITs go up and down according to supply and demand or market forces. When the share price is higher than the NAV, the investment trust is said to be trading at a premium, when the share price is lower it trades at a discount. Tax Advantages: Investors are exempt from Capital Gains Taxes. Avoiding the double taxation which would otherwise arise when shareholders sell their shares in the i