securities firms (ch21) – fin 331
TRANSCRIPT
Securities Firms (ch21) – Fin 331 1
Securities Firms
• Investment Banking Business
• Brokage Service
• Investment Funds– Mutual Funds– Hedge Funds
Securities Firms (ch21) – Fin 331 2
Investment Banking
• Investment banks’ major responsibility is to assist in the initial sale of securities in the primary market, namely, underwriting stocks and bonds– Include both IPOs and seasoned offers
• Glass-Steagall Act separates commercial banking from investment banking
Securities Firms (ch21) – Fin 331 3
Underwriting Stocks and BondsGiving Advice
When to offer?At what price?
Filing DocumentsSECRegistration statementProspectus
UnderwritingSyndicate
Tombstones
Marketing OutcomesFully subscribed Undersubscribed
Oversubscribed Best Efforts
Securities Firms (ch21) – Fin 331 4
Ten Largest Underwriters in the U.S.
Securities Firms (ch21) – Fin 331 5
Other Investment Banking Service
• Private Placement
• Mergers and Acquisitions– Active in this market since 1960s– Serves both acquirers and target firms
Securities Firms (ch21) – Fin 331 6
Securities Brokers and DealersBrokerage Service
a. Securities Orders Market OrderLimit Order – buy with maximum acceptable
price and sell with minimum price short sell
b. Other ServicesMargin Credit
brokage-based cash management accountc. Full-Service Brokers – provide research and investment
adviced. Discount Brokers – execute trades on request
Securities DealersMarket Makers – increase market liquidity
Securities Firms (ch21) – Fin 331 7
Box 1: Using the Limit-Order Book
Unfiled Circuit City Limit Orders
__________________________________
Buy Orders Sell Orders
37 100
37.125 300
37.25 100
37.375 200
37.50 500
37.625 100
Any deal now?
Securities Firms (ch21) – Fin 331 8
Orders
1. 200-share market buy order
2. 300-share limit sell order at 37.125
3. 500-share limit buy order at 36.875
The order book is:
Securities Firms (ch21) – Fin 331 9
Short-selling – borrow shares
Joel shorts 200 shares of IBM stocks at $50/share. Later on the stock price goes to $40/share. How much profit/loss Joel has made in this transaction?
Securities Firms (ch21) – Fin 331 10
Buy-on-margin – borrow money
Amy bought 10,000 shares of IBM stocks at $50/shares with her margin account. The IBM price increases to $60 later. How much profits/losses Amy could make?
Securities Firms (ch21) – Fin 331 11
Types of Mutual Funds
Balanced Funds
Bond Funds
Value Funds
Growth Funds
Growth and Income Funds
Index Funds
Money Market Mutual Funds
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Mutual Funds on the Rise
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Distribution of Mutual Fund Net Assets by Type of Fund
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Household Ownership of Mutual Funds
Securities Firms (ch21) – Fin 331 15
Fee Structure of Investment Funds
Open-End Fund
Load Funds
No-Load Funds
Closed-End Fund
Securities Firms (ch21) – Fin 331 16
Fees in addition to sales commissions
Contingent deferred sales charge
Redemption fee
Exchange fee
Account maintenance fee
12b-1 fees
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Regulations of Mutual Funds
All funds to register with the SEC
Provide two types of documents: prospectus and shareholder report (page 589)
Securities Firms (ch21) – Fin 331 18
Calculating a Mutual Fund’s Net Asset Value
Net Asset Value (NAV)Definition: Total value of the mutual fund’s stocks, bonds, cash, and
other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding.
Stocks $35,000,000Bonds $15,000,000Cash $3,000,000
Total value of assets $53,000,000Liabilities -$800,000
Net worth $52,200,000Outstanding shares 15 millionNAV =
Securities Firms (ch21) – Fin 331 19
Hedge Funds1. Take advantage of unusual spreads between security prices2. Often highly leveraged 3. Relatively unregulated