Capital markets: Exam 2
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11 Properties of Financial assets
- divisibility and denomination
- cash flow
- term to maturity
- return predictability
- tax status
11 Properties of Financial assets: Moneyness
How easily an asset can be transformed in to money.
11 Properties of Financial assets: Divisibility and Denomination
- The minimum size a financial asset can be liquidated and exchanged for money.
- Desirable for investors not borrowers
11 Properties of Financial assets: Reversibility
- 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
11 Properties of Financial assets: Cash Flow
- 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
11 Properties of Financial assets: Term to Maturity
The remaining life of a debt instrument.
11 Properties of Financial assets: Convertibility
- Can the asset be converted in to anything.
- EX. A corporate convertible bond can be changed in to equity shares.
11 Properties of Financial assets: Currency
- The particular currency the asset is issued in.
- This is important because of the often volatile market.
11 Properties of Financial assets: Liquidity
Assets that can be easily bought or sold.
11 Properties of Financial assets: Return Predictability
How predictable the return on the asset will be.
11 Properties of Financial assets: Complexity
- Is basically the characteristics of the asset
- Is it a convertable bond, callable bond, ect...
11 Properties of Financial assets: Tax Status
- 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
How to calculate discount rate for Present Value?
- 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
What are efficient/Optimal Portfolios?
The maximum level of expected returns given a accepted level of risk
What is underwriting?
The function of buying the new securities from the issuer.
What is a best effort arrangement?
When a firm does no buy the entire issue from the issuer but only agrees only to use their expertise to sell the shares.
What is firm commitment?
When the investment firm agrees to buy to buy the securities from the issuer at a set price.
What is gross spread/underwriting discount?
The difference between the price paid to the issuer and the price at which the investment bank reoffers the security to the public.
What are the two main factors that effect the gross spread?
- The type of security, and
- The size of the offering
What is an IPO?
Is a common stock offering by a company that has not previously issued stock.
What is an underwriting syndicate?
Is a group of investment banks that work together to issue new stock to the public.
What is the Selling Group?
All Financial institutes involved in selling or marketing a new issue but not necessarily involved in the underwriting.
What is the securities act of 1933?
It governs issuance of securities
What is a Bought Deal?
- 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
What is the Auction Process?
Auctioning off the all the securities to the highest bidder or syndicate of bidders.
What is Preemptive rights offering?
Allows existing shareholders the right to buy newly issued shares at a preferred price.
What is Rule 144A?
- Eliminate 2 year holding period
- Encourages non-US corporations to issue securities in US
- Not regulated by SEC
What are the Key function of Secondary Markets?
- Providing security values and required returns
- Providing Liquidity
- Reduces the cost of trading
What are Trading Locations?
- 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
What is a Broker?
- Broker executes investors orders with others investors.
- Revives commission
What is a Dealer?
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
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