Capital Markets.ppt

1、Capital Markets,14,1-2,Chapter Outline,Capital market and securities Fund raisers in the capital markets The three-sector economy of the United States Physical and electronic markets Rapid adjustment of prices as an indication of efficiency Security legislation,1-3,Security Markets,Consist of variou

2、s government bonds and corporate common stock The markets are influenced by variables like: Interest rates Investor confidence Economic growth Global crises, etc.,1-4,Types of Security Markets,Money markets Short-term markets comprising of securities with maturities of one year or less Treasury bill

3、s, commercial paper, negotiable certificates of deposits Capital markets Long-term markets consisting of securities having maturities greater than one year Bonds, common stock, preferred stock, convertible securities These securities comprise a firms capital structure,1-5,International Capital Marke

4、ts,Have played an important role over the last decade due to various factors: The Soviet Union disbanded in 1991 China has moved along a capitalistic course for several decades Central and Eastern European countries “privatized” many of their state industries during the 1990s Continuing development

5、of international “free trade”,1-6,International Capital Markets (contd),Establishment of NAFTA in 1994 CAFTA reduces trade barriers The six original members of EU abolished internal tariffs in 1968 WTO strives to further liberalize international trade Euro still considered second most important inte

6、rnational currency Value of “euro cash” in circulation now exceeds value of dollars in circulation worldwide,1-7,2006 Total Dollar Trading Volume on Ten Largest Equity Markets,1-8,International Capital Markets as a Source of Funds,An opportunity for companies to raise debt capital at the lowest cost

7、 Many list their common stock around the world to: Increase liquidity for the stockholders Provide opportunities for the potential sale of new stock in foreign countries About 3.7% of foreign investment has been invested in government securities,1-9,Competition for Funds in the U.S. Capital Markets,

8、Securities available in the capital market: The federal government Government agencies State governments Local municipalities Investors must choose among corporate and noncorporate securities with the desire to: Maximize returns for any given level of risk,1-10,Government Securities,U.S. government

9、securities - Treasury Manages the federal governments debt in order to balance the flow of funds Sells short- or long-term securities to finance shortfalls or retires in case of surplus Federally sponsored credit agencies Governmental units issuing securities on a separate basis from those sold by U

10、.S. Treasury Includes: Federal Home Loan Banks (FHLB),1-11,Government Securities (contd),Federal National Mortgage Association (Fannie Mae) Farm Credit Banks Student Loan Marketing Association State and local securities Municipal securities or tax-exempt offerings Investors - high marginal tax brack

11、ets Supported by revenue-generating projects,1-12,Corporate Securities,Corporate bonds Debt instruments having a fixed life and to be repaid at maturity As bonds come due and are paid off, the corporation normally replaces this debt with new bonds Preferred stock Least used of all long-term securiti

12、es since the dividend is not tax-deductible to the corporation,1-13,Corporate Securities (contd),Common stock Sold by companies desiring new equity capital Either sold as a new issue in an initial public offering (IPO) or as a secondary offering Treasury stock: When a company purchases its own stock

13、 availability of surplus cash,1-14,Internal versus External Sources of Funds,Internally generated funds include retained earnings and cash flow added back from depreciation Composition of internal funds is a function of: Corporate profitability The dividends paid The resultant retained earnings The

14、depreciation tax shield firms avail,1-15,Internally Generated Funds: Depreciation and Retained Earnings,1-16,The Supply of Capital Funds,Household sector - major supplier of funds Indirect investments: Household savings generated by wages Transfer payments from the government Wages and dividends fro

15、m the corporations These are funneled to financial intermediaries Diverse financial institutions channel funds into commercial banks, mutual savings banks, and credit unions,1-17,Flow of Funds Through the Economy,1-18,Suppliers of Funds to Credit Markets (September 2007),1-19,The Role of the Securit

16、y Markets,The capital markets are divided into many functional subsets Each specific market serves a certain type of security Secondary trading: The security trades in appropriate markets not original offering Provides liquidity to investors and keeps the prices competitive,1-20,The Role of the Secu

17、rity Markets (contd),Security markets provide liquidity by: Enabling corporations to raise funds by selling new issues of securities Allowing investor to sell them with relative ease and speed Corporations and government units would not be able to raise large amounts of capital for economic growth w

18、ithout markets,1-21,The Organization of the Security Markets,Security markets structuring has changed because of: Technological advances which include: The rise of electronic communication networks (ECNs) Mergers or alliances between exchanges Transformation of member exchanges into public companies

19、 Acquisition of leading ECNs by the traditional exchanges,1-22,Traditional Organized Exchanges,Either national or regional, both structured in similar fashion Historically, exchanges have central trading location, securities bought & sold in auction market by brokers acting as agents for buyers & se

20、llers Each stock trades at a physical location, trading post, on exchanges trading floor Brokers are registered members of exchanges,1-23,Regional Exchanges,Began by trading securities of local firms Also listed on national exchanges but continued to be traded on regionals Trade primarily done in na

21、tionally known companies Trading in same companies common between NYSE and regionals like Chicago Stock Exchange dual trading More than 90 percent of companies traded on the Chicago Stock Exchange also listed on the NYSE - dual trading,1-24,Listing Requirements,A firms securities can be traded on an

22、 exchange if company meets listing requirements and has been approved by board of governors of that exchange All exchanges have minimum requirements that must be met before trading occurs in companys common stock NYSE - biggest exchange, generates most dollar volume in large companies, listing requi

23、rements are most restrictive NASDAQ has less restrictive listing requirements than NYSE,1-25,Electronic Communication Networks (ECNs),Electronic trading systems that automatically buy and sell orders at specified prices Also known as alternative trading systems (ATSs) Have SEC approval to be fully i

24、ntegrated into the national market system Can choose to act as broker-dealer or an exchange Lower the cost of trading Forced organized security exchanges to make significant changes in their operations and structure,1-26,The New York Stock Exchange,In 2006, NYSE merged with a large ECN and became a

25、public company Comprises of thousands of huge companies whose shares are listed on the NYSE Specialists meet to buy and sell securities through a bid and ask market, called an auction market They are registered members of the exchange In addition to acquiring Archipelago, NYSE merged with Euronext N

26、YSE acquired American Stock Exchange in 2008,1-27,The NASDAQ Market,NASDAQ: Was once considered an OTC market All trades done electronically Second largest exchange in the U.S. Currently owns 30% of London Stock Exchange Known for trading technology and listing of many of the worlds largest technolo

27、gy companies,1-28,The NASDAQ Market (contd),Created SuperMontage, electronic trading system that integrates trading process with limit orders, time stamps for receipt of orders, multiple quotes, etc. Acquired the largest ECN called INET, and later BRUT Created more speed and price efficiency in orde

28、r executions Divides its markets into national and small capitalization markets,1-29,World Federation of Exchanges Members (2006),1-30,Market Efficiency,Markets in general are efficient when: Prices adjust rapidly to new information There is a continuous market, in which each successive trade is mad

29、e at a price closer to the previous price The market can absorb large dollar amounts of securities without destabilizing the prices The important variable affecting efficiency is the certainty of income stream,1-31,Market Efficiency (contd),Fixed income securities, with known maturities, have reason

30、ably efficient markets The most efficient is that for U.S. government securities Corporate bond markets are reasonable to a degree Common stocks market has been supported through decimalization, ECNs, etc.,1-32,The Efficient Market Hypothesis,Weak form Past price information is unrelated to future p

31、rice Trends cannot be predicted and taken advantage of by investors Semistrong form Prices currently reflect all public information Strong form All information, both private and public, is immediately reflected in stock prices,1-33,Regulation of the Security Markets,Organized securities markets are

32、regulated by the: Securities and Exchange Commission (SEC) Self-regulation of the exchanges Three laws govern the sale and trading of securities with a primary purpose: To protect unwary investors from fraud and manipulation To make markets more competitive and transparent,1-34,Securities Act of 193

33、3,Important features include: All offerings except government bonds and bank stocks to be sold in more than one state to be registered with the SEC The registration statement is to be filled 20 days in advance of date of sale and must include detailed corporate information The SEC does not certify t

34、he fairness of a price, but only that the information seems to be accurate All new issues of securities must be accompanied by a prospectus containing the same information appearing in the registration statement Officers of the company and other experts preparing the prospectus or the registration s

35、tatement could be sued for penalties and recovery of realized losses in case of discrepancies in information,1-35,Securities Exchange Act of 1934,Some of the important features include: Guidelines for insider trading preventing them from taking quick advantage of information resulting in short-term

36、gains The Federal Reserves Board of Governors responsible for setting margin requirements to determine quantity of credit Manipulation of securities by conspiracies among investors was prohibited SEC given control over the proxy procedures of corporations SEC required that certain reports be filled

37、periodically, for its regulation of companies traded on the markets All security exchanges to register with the SEC,1-36,Securities Acts Amendments of 1975,Major focus: to direct the SEC to supervise the development of a national securities market Assumed that any national market would extensively u

38、se computers and electronic communication devices Prohibited fixed commissions on public transactions, also prohibited banks, insurance companies and other financial institutions from buying stock exchange membership to save commission costs The Intermarket Trading system, computerization demonstrat

39、ed by the ECNs, and a more competitive structure has now been observed,1-37,Sarbanes-Oxley Act of 2002,Not directly related to security trading Features include: Authorization of an independent private-sector board to oversee the accounting profession Creation of new penalties and long prison terms

40、for corporate fraud and document destruction Restrictions on accounting firms from providing consulting services to audit clients, and other similar provisions The act holds corporate executives legally accountable for the accuracy of their firms financial statements It requires the CEO, along with

41、the CFO, to sign off documents, making monitoring a very serious business,Investment Banking Public and Private Placement,15,1-39,Chapter Outline,What is investment banking? Functions of an investment banker Dilution of earnings Public versus private financing Leveraged buyouts and debt for restruct

42、uring of a corporation,1-40,The Role of Investment Banking,The investment banker is the link between the corporations in need of funds and the investor Responsible for designing and packaging a security offering Responsible for selling the securities to the public,1-41,Concentration of Capital,Allow

43、s large firms to take additional risks and satisfy the needs of an increasingly demanding capital market Competition has propelled many businesses to the position they are at now Raising capital has become an international proposition Firms that are very large have the ability to compete Internation

44、al consolidations with international buy-outs of banks have become common,1-42,Gramm-Leach-Bliley Act (1999),Repealed the separation policy of the Depression-era laws Which included separating banking, brokerage, insurance, and investment banking into separate entities Federal Reserve and Treasury:

45、Have the power to impose restrictions on the activities of the banks Allows strong banks to participate in the venture capital market,1-43,Investment Banking Competitors,There is intense competition in the market Being a leader in one sector helps a firms overall reputation It, however, does not ens

46、ure success in other areas,1-44,Functions of the Investment Dealer,Underwriter: buying the security and reselling it to the public (large companies). Takes a risk. selling security on commission basis (unknown companies) Market Maker: ensuring an available market by buying and selling the security A

47、dvisor: on securities issues, mergers and acquisitions, leveraged buyouts, corporate restructuring Agent: for private placements, mergers, acquisitions,PPT 15-4,1-45,Underwriter,An investment banker underwrites any risk associated with a new issue: By giving a firm commitment to purchase the securit

48、ies from the corporation Large investment houses assume risk of distribution Smaller investment houses may handle distributions for unknown corporations This is done on a “best efforts” or commission, basis,1-46,Market Maker,Investment banker engaged in buying and selling of the security to ensure a

49、 liquid market Provides research on the firm to encourage active investor interest,1-47,Advisor,Services offered include advising the client on a continuing basis about: The types of securities to be sold The number of shares or units for distribution The timing of the sale Important advisory servic

50、es in the area of mergers and acquisitions, leveraged buyouts, and corporate restructuring are also offered,1-48,Agency Functions,An investment banker may act as an agent for a corporation That wishes to place its securities privately with: An insurance company, A pension fund, or A wealthy individu

51、al Involves in negotiation of the best possible deal for the corporation with potential investors,1-49,Distribution Process in Investment Banking,1-50,The Spread,The underwriting spread represents the total compensation for all participating members The lower a party falls in the distribution proces

52、s, the higher the price for the shares The farther down the line the securities are resold, the higher the potential profit The larger the dollar value of an issue, the smaller the spread is as a percentage of the offering price,1-51,Allocation of Underwriting Spread,1-52,Pricing the Security,Invest

53、ment Banker Price of the stock is an important consideration Conduct an in-depth analysis to determine a firms value: The companys industry Financial characteristics Anticipated earnings Dividend-paying capability,1-53,Pricing the Security (contd),Based on a technique deemed appropriate by the under

54、writer: A tentative price is assigned This will be compared to others in that given industry Anticipated public demand also plays a major factor Underpricing Setting the price slightly below the current market value Common during the issuance of additional shares,1-54,Dilution,Problem associated wit

55、h the issuance of additional securities: Actual or perceived dilution of earnings effect on shares currently outstanding May be caused by the perceived time lag in the recovery of earning per share Resulting from increase in shares outstanding,1-55,Market Stabilization,An investment banker is respon

56、sible for stabilizing the offering during the distribution period: Accomplished by repurchasing securities when market price is below initial public offering price Stabilization lasts for two or three days after initial offering Poor market environment - stabilization may be very difficult to achiev

57、e Underwriter price support an exception to market manipulation,1-56,Aftermarket,Research shows that the IPO generally tends to perform well in the immediate aftermarket After the first day of trading, IPO returns are approximately 3.4% lower than returns for similar sized firms over the first full

58、year of trading The IPO appears to be a good deal for investors who purchase shares from the underwriter,1-57,Shelf Registration (1982),Permits large companies to file one comprehensive registration statement Should outline the firms financing plans for up to 2 years The firm can issue securities wi

59、thout further SEC approval This registration has become part of the underwriting process Most frequently used with debt issues, and utilized minimally with the equity markets,1-58,Public Vs. Private Financing for Companies,Publicly financed company: when shares of a company are offered to the public

60、 anyone can buy shares of the stock Privately financed company: privately owned or held by an individual or family securities not available to the general public additional funds may be raised by private placement,PPT 15-9,1-59,Advantages of Being Public,To the Corporation: Tap security markets for