Capital markets: Exam 2

• Moneyness
• divisibility and denomination
• reversibility
• cash flow
• term to maturity
• convertibility
• currency
• liquidity
• return predictability
• complexity
• tax status

How easily an asset can be transformed in to money.

• The minimum size a financial asset can be liquidated and exchanged for money.
• Desirable for investors not borrowers

• The cost of investing in a financial asset and then getting out and back into cash again.
• Aka- turnaround cost or round trip cost
• Most relevant form comes from bid-ask spread

• The return that an investor will realize by holding a financial asset depends on all the cash distributions that the financial asset will pay its owners.
• Including- dividends on shares and coupon payments on bonds

The remaining life of a debt instrument.

• Can the asset be converted in to anything.
• EX. A corporate convertible bond can be changed in to equity shares.

• The particular currency the asset is issued in.
• This is important because of the often volatile market.

Assets that can be easily bought or sold.

How predictable the return on the asset will be.

• Is basically the characteristics of the asset
• Is it a convertable bond, callable bond, ect...

• taxing can differ from: asset to asset, length of time held, the nature of the owner.
• Coupons on municipal bonds and pensions are generally tax exempt

• R= RR + IP + DP + MP + LP + EP
• RR= Real rate of intrest
• IP= Inflation Premium
• DP= Default risk premium
• MP= Maturity Premium
• LP= liquidity Premium
• EP= Exchange-rate risk premium

The maximum level of expected returns given a accepted level of risk

The function of buying the new securities from the issuer.

When a firm does no buy the entire issue from the issuer but only agrees only to use their expertise to sell the shares.

When the investment firm agrees to buy to buy the securities from the issuer at a set price.

The difference between the price paid to the issuer and the price at which the investment bank reoffers the security to the public.

• The type of security, and
• The size of the offering

Is a common stock offering by a company that has not previously issued stock.

Is a group of investment banks that work together to issue new stock to the public.

All Financial institutes involved in selling or marketing a new issue but not necessarily involved in the underwriting.

It governs issuance of securities

• Offers a potential issuer of debt securities a firm bid to purchase a specified amount of securities with a given coupon rate and maturity.
• Limited time

Auctioning off the all the securities to the highest bidder or syndicate of bidders.

Allows existing shareholders the right to buy newly issued shares at a preferred price.

• Eliminate 2 year holding period
• Encourages non-US corporations to issue securities in US
• Not regulated by SEC

• Providing security values and required returns
• Providing Liquidity
• Reduces the cost of trading

• Organized Exchanges (i.e. NYSE)
• Over the counter Exchanges (i.e. Nasdaq)

• No buyer or seller can influence market price
• Everything is Transparent
• You know what your getting
• Low Barrier for entry

• Broker executes investors orders with others investors.
• Revives commission

Is a trader that works for somebody else

—Offers investors reasonably priced services related to buying and selling securities

—Prices fully reflect all available information relevant to the valuation of securities