fin mang chapter 2

financial markets help facilitate the transfer of funds from "saving surplus" units to "saving deficit" units (i.e. transfer money from those who have the money to those who need the money")

• direct transfer
• indirect transfer using investment banker
• indirect transfer using financial intermediary

firm seeking funds directly approach a wealthy investor (i.e. business venture seeking funding from venture capitalist)

easiest way if haven't built reputation yet

prime source of funding for start up companies and companies in turn around situations- risky but offers high return

investment banker acts as a link between the firm (needing funds and the investors (with surplus funds)

fin intermediary collects funds from savers in exchange of its own securities (indirect). Collected funds are used to acquire securities (i.e. stocks, bonds, direct) from firm

public

both individuals and institutional investors have opportunity to purchase securities sold by the managing investment bank firm--firm never meets ultimate purchaser of securities

securities are offered and sold to a limited number of investors

market in which new issues of a securities are sold to initial buyers. Only time issuing firm ever gets any money for the securities

sale of additional shares by a company whose shares are already publicly traded

goes with primary marketing

subsequent trading- previously issued securities are traded. issuing corporation doesn't get any money for stocks traded on the secondary market

for short term debt instruments (maturity periods of 1 yr or less). telephone or compute market

treasury bils, commercial paper,Cds, bankers acceptances

market for long term financial securities (maturity greater than 1 yr)..corporate bonds, common stocks, treasury bonds, term loans, leases

tangible entities and financial instruments are traded on the premises (NY stock exchange)

provides a continuous market, establishes and publicizes fair security prices, helps business raise new capital

all securities marke except organized exchanges

-if don't want to pay fees, higher reporting requirements, don't meet the requirements of exchanges

refers to the cash market, where transaction takes place on the spot/today at the current market price

make an agreement to buy/sell in the future at a price that is set today

financial specialists involved as an intermediary in the sale of securities (stocks/bonds). buy the entire issue of securities from the issuing firm and then resell it to the general public

• underwriting (assuming risk)
• distributing (once securities are purchased from issuing firm, they are distributed to ultimate investors)
• advising (on timing of sale, type of security)

issuing firm selects an investment banker to underwrite the issue. firm and investment banker negotiate the terms of the offer

several investment bankers bid for the right to underwrite the firm's issue. firm selects the banker offering the highest price (risk: can't sell everything they're issued)

issue is not underwritten- no money paid upfront for stocks- no risk for investment banker, attempts to sell it for a commission

investment banker helps market new issue to a select group of investors and usually targeted to current stockholders, employees, customers

investors place bids indicating how many shares they are willing to buy and at what price- price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares

issuing firm sells securities directly to the investing public- NO investment banker

• private placements of debt refers to raising money directly from prominent investors (i.e. life insurance companies)
• -can have investment banker if want to

transaction cost incurred when a firm raises funds by issuing securities - underwriter's spread (diff between gross and net proceeds) and issuing costs (printing/engraving security certificates, fees)

high risk

rate of return on next best investment alternative to the investor

dispersion of variability around the mean rate of return in the financial markets

return earned about the rate of inflation

additional return required by investors in long-term securities to compensate for greater risk of price fluctuations on those securities caused by interest rate changes

additional return required by investors in securities that can't be quickly converted into cash at a reasonably predictable price

direct; inflation and interest rates

• degree of inflation
• default premium
• maturity premium
• liquidity premium

• unbiased expectations theory
• liquidity preference theory
• market segmentation theory

term structure is determined by an investor's expectations about future interest rates

investors require maturity premiums to compensate them for risk of uncertain future interest rates

legal restrictions and personal preferences limit choices for investors to certain rangers of maturities