principles of managerial finance 9th edition chapter 2 institutions, securities, markets and rates
TRANSCRIPT
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Principles of Managerial Finance
9th Edition
Chapter 2
Institutions, Securities,
Markets and Rates
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Learning Objectives• Understand the relationship between financial
institutions and markets, and the role of the money
market.
• Describe the key characteristics and types of
corporate bonds.
• Differentiate between debt and equity capital.
• Discuss the rights, characteristics, and features of
both common and preferred stock.
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Learning Objectives
• Review the operation of the capital market, particularly
the securities exchanges and the role of the
investment banker.
• Describe the interest rate fundamentals and the basic
relationship between risk and rates of return.
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Financial Institutions & Markets
• Firms that require funds from external sources can
obtain them in three ways:
– through a bank or other financial institution
– through financial markets
– through private placements
• This chapter will focus on financial institutions and
markets
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Financial Institutions & Markets
• Financial institutions are intermediaries that channel
the savings of individuals, businesses, and
governments into loans or investments.
• The key suppliers and demanders of funds are
individuals, businesses, and governments.
• In general, individuals are net suppliers of funds, while
businesses and governments are net demanders of
funds.
Financial Institutions
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Financial Intermediaries in the U.S.
Depository Institutions Investment Institutions
Commercial Banks Investment Companies and Mututal Funds
S&Ls Real Estate Investment Trusts
Savings Banks Money Market Funds
Credit Unions
Contractual Savings Institutions Finance Companies
Life Insurance Companies Sales Finance Companies
Private Pension Funds Consumer Finance Companies
State & Local Government Retirement Funds Commercial Finance Companies
Major Intermediaries in the U.S. Financial System
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The Changing Role of Financial InstitutionsDIDMCA
• A revolution in the financial services industry began
with the passage of the Depository Institutions
Deregulation and Monetary Control Act of 1980.
• This legislation was crafted and passed as a result of
the tumultuous conditions in the financial markets
during the late 1970s which resulted in rapid
disintermediation.
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• DIDMCA (1980) actually consisted of two parts:
Depository Institutions Deregulation and Monetary
Control.
• DID was designed to do a number of things:
– curtail regulation Q (interest rate ceilings)
– increase various sources of funding available to
banks
– expand the scope and activity of S&Ls by allowing
them to invest in other than home mortgages
The Changing Role of Financial InstitutionsDIDMCA
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• The monetary control (MC) portion of DIDMCA was
designed to extend the Fed’s control to thrifts and
nonmember banks by extending reserve requirements
and other controls to them.
• This permitted both greater competition for deposits
and more flexibility in terms of the types of investments
various institutions could make.
The Changing Role of Financial InstitutionsDIDMCA
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Financial Markets
• Financial markets provide a forum in which suppliers
of funds and demanders of funds can transact
business directly.
• The two key financial markets are the money market
and the capital market.
• Transactions in short term marketable securities take
place in the money market while transactions in long-
term securities take place in the capital market.
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Financial Markets• Whether subsequently traded in the money or capital
market, securities are first issued through the primary
market.
• The primary market is the only one in which a
corporation or government is directly involved in and
receives the proceeds from the transaction.
• Once issued, securities then trade on the secondary
markets such as the New York Stock Exchange or
NASDAQ.
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Financial Markets
U.S. Treasury Bills U.S. Treasury Notes & Bonds
Negotiable CDs U.S. Government Agency Bonds
Bankers Acceptances State & Local Government Bonds
Federal Funds Corporate Bonds
Commercial Paper Corporate Stocks
Repurchase Agreements Real Estate Mortgage Security
Mortgage Backed Security
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• While real assets include the direct ownership of
tangible assets such as land or buildings, financial
assets represent claims against the income and
assets of those who issued the claims.
• Types of financial assets include stocks, bonds, and
bank deposits.
• Some financial assets, such as stocks and bonds, can
be traded in the secondary markets while others, such
as bank deposits, cannot.
Claims to Wealth
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The Relationship between Financial Institutions and Financial Markets
Indirect finance
Direct finance
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• The money market exists as a result of the interaction
between the suppliers and demanders of short-term
funds (those having a maturity of a year or less).
• Most money market transactions are made in
marketable securities which are short-term debt
instruments such as T-bills and commercial paper.
• Money market transactions can be executed directly or
through an intermediary.
The Money Market
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Money market instrument
• Treasury bill
• Banker’s acceptance
• Negotiable certificate of deposit
• Commercial paper
• Federal funds
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• The international equivalent of the domestic (U.S.)
money market is the Eurocurrency market.
• The Eurocurrency market is a market for short-term
bank deposits denominated in U.S. dollars or other
marketable currencies.
• The Eurocurrency market has grown rapidly mainly
because it is unregulated and because it meets the
needs of international borrowers and lenders.
The Money Market
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Corporate Bonds
• Bonds are long-term debt instruments issued by
corporations.
• Corporate bonds typically pay interest semiannually,
pay fixed coupon interest, have a par or face value of
$1,000 and have an original maturity of 10 to 30 years.
• Furthermore, they have a prior claim on the firm’s
assets (in from of stockholders) but do not represent
ownership in the firm.
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Corporate Bonds
• The bond indenture specifies the conditions under
which it has been issued.
• It outlines both the rights of bondholders and duties of
the issuing corporation.
• It also specifies the timing of interest and principal
payments, any restrictive covenants, and sinking fund
requirements.
Legal Aspects
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Corporate Bonds
• Common standard debt provisions in the
indenture typically include:
– the maintenance of satisfactory accounting records
– periodically furnishing audited financial statements
– the payment of taxes and other liabilities when due
– the maintenance of all facilities in good working
order
– identification of any collateral pledged against the
bond
Legal Aspects
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Corporate Bonds
• Common restrictive provisions (or covenants) in the
indenture typically include:
– the maintenance of a minimum level of liquidity
– prohibiting the sale of accounts receivable
– the imposition of certain fixed asset investments
– constraints on subsequent borrowing
– limits on annual cash dividend payments
Legal Aspects
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Corporate Bonds
• An additional restrictive provision often included in the
indenture is a sinking fund requirement, which
specifies the manner in which a bond is systematically
retired prior to maturity.
• Sinking funds typically dictate that the firm make semi-
annual or annual payments to a trustee who then
purchases the bonds in the market.
Legal Aspects
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Corporate Bonds
• In general, the longer the bond’s maturity, the higher
the interest rate (or cost) to the firm.
• In addition, the larger the size of the offering, the lower
will be the cost (in % terms) of the bond.
• Finally, the greater the risk of the issuing firm, the
higher the cost of the issue.
Cost of Bonds
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Corporate Bonds
• The conversion feature of convertible bonds allows
bondholders to exchange their bonds for a specified
number of shares of common stock.
• Bondholders will exercise this option only when the
market price of the stock is greater than the conversion
price.
• A call feature (callable bond), which is included in most
corporate issues, gives the issuer the opportunity
to repurchase the bond prior to maturity at the call price.
General Features
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Corporate Bonds
• In general, the call premium is equal to one year of
coupon interest and compensates the holder for having
it called prior to maturity.
• Furthermore, issuers will exercise the call feature when
interest rates fall and the issuer can refund the issue at
a lower cost.
• Issuers typically must pay a higher rate to investors for
the call feature compared to issues without the feature.
General Features
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Corporate Bonds
• Bonds also are occasionally issued with stock
purchase warrants attached to them to make them
more attractive to investors.
• Warrants give the bondholder the right to purchase a
certain number of shares of the same firm’s common
stock at a specified price during a specified period of
time.
• Including warrants typically allow the firm to raise debt
capital at a lower cost than would be possible in their
absence.
General Features
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Variety of Corporate Debt
Mortgage Bonds
• Mortgage bonds are backed by real estate and/or the
physical assets of the corporation.
• The real assets pledged will have a market value
greater than the bond issue.
• If the company defaults on the bonds, the real assets
are sold off to pay off the mortgage bond holders.
Secured Bond
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Equipment Trust Certificates
• Equipment trust certificates are very similar to
automobile loans.
• When you borrow money for your new car, you make
a down payment. Then you make your monthly
installment payments.
• At no time throughout the life of the loan is your car
worth less than the outstanding amount of the loan.
Variety of Corporate DebtSecured Bond
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• Many railroad and transportation companies use
equipment trust certificates to meet their financing
needs. airline trustee investor
• Usually, 20% of the purchase price is put down by the
company in the form of a down payment. Then the
balance is paid off over 15 years.
Variety of Corporate Debt
Equipment Trust CertificatesSecured Bond
lease
Serial payment
fund
ETCfund buy
Airplane manufacturer
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• When the company is finished paying off the loan, it
receives clear title from the trustee.
• If the company defaults on its loan, the equipment is
sold off and the bond holders are paid off.
Variety of Corporate Debt
Equipment Trust Certificates
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• Equipment Trust Certificates are serial bonds.
• That is, each time a payment is made, a portion of that
payment is interest and a portion of that payment is
principal.
• In this way, as previously stated, the loan amount
never exceeds the collateral value.
Variety of Corporate Debt
Equipment Trust Certificates
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Debentures
• Debentures are unsecured promissory notes that are
supported by the general creditworthiness of the
issuing company.
• Because no assets are pledged, these bonds are
riskier than collateralized bonds.
• As a result, they are often referred to as subordinate
debt and carry higher interest rates and/or other
features to make them more desirable to investors.
Variety of Corporate DebtUnsecured Bond
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Income Bonds
• Income bonds will only pay interest if income is earned
by the issuing company and only to the extent that
income is earned.
• Income bonds are the only bonds issued where failure
to pay the interest in a timely fashion does not lead to
immediate default.
• As a result, income bonds are considered to be
extremely risky.
Variety of Corporate DebtUnsecured Bond
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• In general, income bonds are issued by a company in
bankruptcy.
• The company facing bankruptcy will meet with its
creditors (usually bond holders) and agree to issue
new income bonds in exchange for the old bonds.
• Because failure to pay interest would land the
company back into bankruptcy court, the creditors
agree that interest will only be paid to the extent
earned.
Variety of Corporate DebtIncome Bonds
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Convertible Bonds
• Convertible bonds are one type of hybrid security.
• They are like bonds in that they pay a fixed rate of
interest and have a maturity date.
• They are also like stock because they give the
investor an option to convert the bond into a specified
number of shares of stock.
• The market price of a convertible bond therefore
depends both on the firm’s stock price and prevailing
interest rates.
Variety of Corporate Debt
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Variable Interest Rate Bonds (floating-rate bonds)
• Variable interest rate bonds are bonds with coupon
rates that vary with changes in short-term interest
rates (like adjustable rate mortgages).
• Usually, the interest rate is pegged to another rate
such as U.S. Treasury bills.
• In general, the market price of a variable rate bond will
be less volatile.
• On most bonds, an increase in interest rates will result
in a decrease in market price.
Variety of Corporate Debt
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Discount and Zero Coupon Bonds
• A zero coupon bond pays no coupon interest from
year to year the way most bonds do.
• Investors earn their returns by purchasing the bonds
at deep discounts from the bond’s face value, and
then receiving the full face value at maturity.
• Since the return on a zero depends strictly on the
issuing firm’s ability to pay the face value at maturity,
only the most creditworthy firms are able to issue
them.
Variety of Corporate Debt
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High-Yield (Junk) Bonds
• High-yield bonds are not a different type of bond -- simply a
bond of lower quality.
• Bonds rated BB (S&P) or Ba (Moody’s) or lower are considered
to be junk.
• Junk bonds are usually debentures and are subordinated to the
firm’s other debt.
• In general, junk bonds pay around 3 to 4 percent higher yields
to investors than higher-grade bonds.
Variety of Corporate Debt
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Variety of Corporate Debt
• Extendible Notes: Short-tern ( 1-5 years) note
renewable at the option of holders in the new market
rate.
Extendible Notes
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Variety of Corporate Debt
• Putable bond: bonds redeemable at par value at the option of holder 在發行後的某個時間點,或者當公司被併購、併購別人、或大幅舉債時。
Putable Bonds
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Retiring DebtSerial-Bonds
• A serial bond is simply one in which some of the
bonds in the issue mature or are retired each year
rather than all at once.
• Serial bonds are usually used by companies to finance
costly equipment, or by municipalities to finance
capital improvements.
• Also, the assets financed are usually used as
collateral to secure the bonds.
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Sinking Funds
• A sinking fund is simply a series of periodic payments
to retire part of a debt issue.
• In most cases, the periodic payments plus the interest
earned on those deposits retire the debt at maturity.
• In some cases, the firm sets aside funds and randomly
selects bonds to be called.
• Strong sinking funds set aside a large amount to be
retired (say 10% per year).
Retiring Debt
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• Weak sinking funds will leave most of the issue
outstanding until maturity.
• This is sometimes referred to as a balloon payment.
• Bonds with strong sinking funds are generally
considered to be less risky than those with weak
sinking funds.
Retiring DebtSinking Funds
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Repurchasing Debt
• Firm’s that have outstanding bonds which have
substantially declined in price and are selling at a
discount are sometimes repurchased by the issuer in
the open market.
• Thus, a firm with bonds selling at $500 with a face
value of $1000 can cut their financing costs in half.
• However, this decision must be weighed against any
alternative uses for the cash used to execute the
repurchase. also the subsequent financing needs.
Retiring Debt
When interest rate
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Callable Bonds
• A call feature gives the issuer the right (or option) to retire a
debt issue prior to maturity.
• Issuer’s tend to call bonds that were issued during a period of
high interest rates because it gives them the opportunity to
refund the debt at a lower rate.
• To protect investors, callable bonds usually require the issuer to
pay a call premium which amounts to one year of extra interest
expense (but usually declines over time).
• *putable bond: holders have the option to redeem it at par at
every 1 to 5 years or when firms liquidate, M&A,…
Retiring DebtEurobondForeign bond
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Sources of Risk
• Default Risk
– Risk that the interest will not be paid
– Risk that the principal will not be paid
– Risk that the price of the bond will decline due to
poor company prospects
• Inflation Risk
• Call Risk
• Interest Rate Risk.
Bond Risk
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Corporate BondsBond Ratings
Junk bond
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The Nature of Equity CapitalContrasting Debt & Equity
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The Nature of Equity CapitalVoice in Management
• Unlike bondholders and other credit holders, holders
of equity capital are owners of the firm.
• Common equity holders have voting rights that permit
them to elect the firm’s board of directors and to vote
on special issues.
• Bondholders and preferred stockholders receive no
such privileges.
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The Nature of Equity CapitalClaims on Income & Assets
• Equity holders are have a residual claim on the firm’s
income and assets.
• Their claims can not be paid until the claims of all
creditors, including both interest and principle
payments on debt have been satisfied.
• Because equity holders are the last to receive
distributions, they expect greater returns to
compensate them for the additional risk they bear.
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The Nature of Equity CapitalMaturity
• Unlike debt, equity capital is a permanent form of
financing.
• Equity has no maturity date and never has to be
repaid by the firm.
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The Nature of Equity CapitalTax Treatment
• While interest paid to bondholders is tax-deductible to
the firm, dividends paid to preferred and common
stock holders is not.
• In effect, this lowers the cost of debt relative to the
cost of equity as a source of financing to the firm.
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Voting Rights
In general, voting rights are relatively meaningless since share ownership is very widely dispersed among a large number of individual shareholders. As a result, directors and top management are relatively well-insulated.
This has begun to diminish to some extent in recent years due to the rapid expansion of large institutional investors such as mutual funds and insurance companies.
Common StockStockholder Rights
Nonvoting common stockSuper-voting common stock
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• Voting Rights
– traditional voting
Under traditional voting, each share owned gives the shareholder the right to vote for one individual for each seat on the board of directors.
Under this system, if the majority of shareholders vote as a block, the minority could never elect a director.
Common StockStockholder Rights
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• Voting Rights
– traditional voting
– cumulative voting
This system empowers minority stockholders by permitting each stockholder to cast all of his or her votes for one candidate for the firm’s board of directors.
Common StockStockholder Rights
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• Voting Rights
– traditional voting
– cumulative voting
– Example:
Under traditional voting, a shareholder with 100 shares can vote 100 shares for each of 5 members of the board of directors.
Under cumulative voting, a shareholder with 100 shares can vote 500 shares for just one member running for the board of directors.
Common StockStockholder Rights
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• Voting Rights
• Preemptive Rights
A preemptive right gives a shareholder the right to maintain his or her proportionate share of the company by requiring that all new shares issued must be done so through a “rights offering.”
Under a rights offering, a shareholder who owns 10% of the shares outstanding has the right to purchase 10% of any additional shares issued.
Common StockStockholder Rights
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• Rights offering: the firm gives existing shareholders a right to purchase additional shares at pro rata basis at price lower than the market
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• Ownership
• Outstanding shares= issued shares-treasury shares
• Additional shares that can be issued in the future = authorized shares –
outstanding shares
Common StockStockholder Rights
Privately ownedClosely ownedPublicly owned
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• Voting Rights
• Preemptive Rights
• Proxies
Proxies are frequently used in the voting process since many smaller stockholders do not attend the annual meeting. Shareholders must sign a proxy statement giving their votes to another party who will then vote their shares.
Common StockStockholder Rights
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• Payment of dividends is at the discretion of the Board
of Directors.
• Dividends may be made in cash, additional shares of
stock, and even merchandise.
• Stockholders are residual claimants -- they receive
dividend payments only after all claims have been
settled with the government, creditors, and preferred
stockholders.
Common StockDividends
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• The international market for common stock is not as
large as that for international debt.
• However, cross-border trading and issuance of stock
has increased dramatically during the past 20 years.
• Much of this increase has been driven by the desire of
investors to diversify their portfolios internationally.
Common StockInternational Stock Issues
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• A growing number of firms are beginning to list their
stocks on foreign markets.
• Issuing stock internationally both broadens the
company’s ownership base and helps it to integrate
itself in the local business scene.
Common StockInternational Stock Issues
Stock Issued in Foreign Markets
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• Only the largest foreign firms choose to list their
stocks in the U.S. because of the rigid reporting
requirements of the U.S. markets.
• Most foreign firms instead choose to tap the U.S.
markets using ADRs -- claims issued by U.S. banks
representing ownership shares of foreign stock trading
in U.S. markets.
Common StockInternational Stock Issues
Foreign Stocks in U.S. Markets
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Preferred Stock• Preferred stock is an equity instrument that usually
pays a fixed dividend and has a prior claim on the
firm’s earnings and assets in case of liquidation.
• The dividend is expressed as either a dollar amount or
as a percentage of its par value.
• Therefore, unlike common stock a preferred stock’s
par value may have real significance.
• If a firm fails to pay a preferred stock dividend, the
dividend is said to be in arrears.
no par value
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• In general, and arrearage must be paid before
common stockholders receive a dividend.
• Preferred stocks which possess this characteristic are
called cumulative preferred stocks. v.s. non-cumulative P.S.
• Preferred stocks are also often referred to as hybrid
securities because they possess the characteristics of
both common stocks and bonds.
• Preferred stocks are like common stocks because
they are perpetual securities with no maturity date.
Preferred Stock
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• Preferred stocks are like bonds because they are fixed
income securities. Dividends never change.
• Because preferred stocks are perpetual, many have
call features which give the issuing firm the option to
retire them should the need or advantage arise.
• In addition, some preferred stocks have mandatory
sinking funds which allow the firm to retire the issue
over time.
• Finally, participating preferred stock allows preferred
stockholders to participate with common stockholders
in the receipt of dividends beyond a specified amount.
Preferred Stock ConvertibleRestrictive covenant
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Preferred Stocks & Bonds Contrasted
• Preferred stocks are riskier than bonds from the
investor perspective because:
– Bond terms are legal obligations
– The investor cannot expect the firm to redeem
preferred stock for a preset face value. It must be
sold in the market at an uncertain price.
• Preferred stock prices are therefore more variable and
thus riskier than bond prices.
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Disadvantages of Preferred Stock
• Preferred stock offers no protection from inflation.
• Preferred stock tends to be less marketable than
either bonds or common stock resulting in a large bid-
ask spread.
• Inferior position to bondholders.
• Yields are insufficient for most (non-corporate)
investors to justify risk.
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Securities Exchanges
• role:
1. Financing
2. Investment
3. Efficient market
4. Price discovery
5. Liquidity
P
Q
S
D
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Securities ExchangesOrganized Exchanges
• Organized securities exchanges are tangible
secondary markets where outstanding securities are
bought and sold.
• They account for over 60% of the dollar volume of
domestic shares traded.
• Only the largest and most profitable companies meet
the requirements necessary to be listed on the New
York Stock Exchange.
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Securities ExchangesOrganized Exchanges
• Only those that own a seat on the exchange can make
transactions on the floor (there are currently 1,366 seats).
• Trading is conducted through an auction process where
specialists “make a market” in selected securities.
• As compensation for executing orders, specialists make
money on the spread (ask price - bid price).
•Bid price = dealer’s highest purchasing price
•Ask price = dealer’s lowest selling price
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Securities ExchangesOrganized Exchanges
Requirements NYSE AMEX
shares held by public 1,100,000 400,000
stockholders with 100+ shares 2,000 1,200
pretax income (latest year) $2,500,000
$750,000
pretax income (prior 2 years) $2,000,000 N/A
MV of public shares held $18,000,000 $300,000
tangible assets $16,000,000 $4,000,000
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Securities ExchangesOver-the-Counter Exchange
• The over-the-counter (OTC) market is an intangible
market for securities transactions.
•The OTC is a computer-based market where dealers
make a market in selected securities and are linked to
buyers and sellers through the NASDAQ System.
• Dealers also make money on the “spread”.
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Securities Price
Quotations
Bond
Quotations
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Securities Price
Quotations
Stock
Quotations
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Functions of Investment BankersUnderwriting, Private Placement & Best Efforts
• Corporations typically raise debt and equity capital
using the services of investment bankers through
public offerings.
• When underwriting a security issue, an investment
bankers guarantees the issuer will receive a
specified amount of money from the issue.
• The investment banker purchases the securities from
the firm at a lower price than the planned resale price.
not in the text book
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Functions of Investment Bankers
• When underwriting an issue, the investment banker
bears the risk of price changes between the time of
purchase and the time of resale.
• With a private placement, the investment banker
arranges for the direct sale of the issue to one or
more individuals or firms and receives a commission
for acting as the intermediary in the transaction.
• When a firm issues securities on a best efforts basis,
compensation is based on the number of securities
sold.
Underwriting, Private Placement & Best Efforts
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Functions of Investment Bankers
• Underwriters also act as advisors and consultants for
corporations.
• They can assist firms in planning both the timing of
an issue and the amount and features of an issue.
• They also can assist in evaluating mergers and
acquisitions.
Advising
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Other Aspects of Investment Banking
• An investment banker may be selected through
competitive bidding, where the banker or group of
bankers that bids the highest price for an issue is
chosen for the underwriting.
• With a negotiated offering, the investment
banker is merely hired rather than awarded the issue
through a competitive bid.
Selecting an Investment Banker
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Other Aspects of Investment Banking
• Underwriting syndicates are typically formed when
companies bring large issues to the market.
• Each investment banker in the syndicate normally
underwrites a portion of the issue in order to reduce
the risk of loss for any single firm and insure wider
distribution of shares.
• The syndicate does so by creating a selling group
which distributes the shares to the investing public.
Syndicating the Underwriting
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Other Aspects of Investment Banking
• Before a new security can be issued, the firm must file
a registration statement with the SEC at least 20 days
before approval is granted.
• One part of the registration statement called the
prospectus details the firm’s operating and financial
position.
• However, a prospectus may be distributed to potential
investors during the approval period as long as a red
herring is printed on the front cover.
Registration Requirements
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Other Aspects of Investment Banking
• As an alternative to filing cumbersome registration
statements, firms with more than $150 million in
outstanding stock can use a procedure called shelf
registration.
• This allows the firm to file a single document that
covers all issues during the subsequent 2 year period.
• As a result, the approved securities are kept “on the
shelf” until the need for or market conditions are
appropriate for issue.
Registration Requirements
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Other Aspects of Investment Banking
• In general, underwriters wait until the end of the
registration period to price securities to ensure
marketability.
• If the issue is fully sold, it is considered an
oversubscribed issue; if not fully sold, it is considered
undersubscribed.
• In order to stabilize the issue at the initial offering price
as it is being offered for sale, investment bankers often
place orders to purchase the security themselves.
Pricing & Distributing an Issue
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Other Aspects of Investment Banking
• Investment bankers earn their income by profiting on
the spread.
• The spread is difference between the price paid for the
securities by the investment banker and the eventual
selling price in the marketplace.
• In general, costs for underwriting equity is highest,
followed by preferred stock, and then bonds.
• In percentage terms, costs can be as high as 17% for
small stock offerings to as low as 1.6% for large bond
issues.
Cost of Investment Banking Services
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• 現增:•IPO :
• 若有競拍,則公開申購之價格為競拍之平均價,並不得低於底價之 1.3倍
• IPO之股票幾乎皆是老股,為了達到“股權分散”
•承銷商賺取利潤:
1.公開申購2.詢價圈購
1.公開申購2.競價拍賣3.券商包銷 (10%~25%)
(90%~75%),其中最多一半採競拍
1.公開申購、競拍、詢圈之手續費2.輔導期之費用:包月、包案、免費3.承銷價與上市後處分之價差 (spread)
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Other Aspects of Investment Banking
• Although diminishing in frequency, firms can also
negotiate private placements rather than public
offerings.
• Private placements can reduce administrative and
issuance costs for firms since registration and
approval from the SEC is not required.
• However, they do pose problems for purchasers since
the securities cannot not be resold via secondary
markets.
Private Placements
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Risk Structure of Interest Rates
k1=nominal interest ratek*=real interest rateIP=expected inflationRP1=risk premium
k1=k*+IP+RP1
k*+IP=rf=risk-free rate
Default risk premiumLiquidity risk premiumTax risk premiumInterest rate risk premiumContractual provisions
Interest rate risk = Price risk + Reinvestment riskPrice risk if maturity Price risk if coupon interest rate Price risk if market rate
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Interest Rates & Required Returns
• The term structure of interest rates relates the interest
rate to the time to maturity for securities with a
common default risk profile.
• Typically, treasury securities are used to construct yield
curves since all have zero risk of default.
• However, yield curves could also be constructed with
AAA or BBB corporate bonds or other types of similar
risk securities.
Term Structure of Interest Rates
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Interest Rates & Required ReturnsTerm Structure of Interest Rates
Impact of Inflation
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Interest Rates & Required ReturnsTerm Structure of Interest Rates
Yield Curves
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Theories of Term Structure
• This theory suggest that the shape of the yield curve
reflects investors expectations about the future
direction of inflation and interest rates.
• Therefore, an upward-sloping yield curve reflects
expectations of higher future inflation and interest
rates.
• In general, the very strong relationship between
inflation and interest rates supports this theory.
Expectations Hypothesis
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Theories of Term Structure
• This theory contends that long term interest rates tend
to be higher than short term rates for two reasons:
– long-term securities are perceived to be riskier than
short-term securities
– borrowers are generally willing to pay more for long-
term funds because they can lock in at a rate for a
longer period of time and avoid the need to roll over
the debt.
Liquidity Preference Theory
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Theories of Term Structure
• This theory suggests that the market for debt at any
point in time is segmented on the basis of maturity.
• As a result, the shape of the yield curve will depend on
the supply and demand for a given maturity at a given
point in time.
Market Segmentation Theory
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Risk Premiums
• Default Risk
• Interest rate Risk
• Liquidity Risk
• Contractual Provisions
• Tax Risk
Issue & Issuer Characteristics
Risk and return
risk
return