Because of the technological advances over the past 10 years coupled with deregulation and increased competition, the difference between an organized exchange and the over-the-counter market has been blurred.
Organized security exchanges are tangible entities whose activities are governed by a set of bylaws. Security exchanges physically occupy space, and financial instruments are traded on the premises.
Stock Exchange Benefits. Both corporations and investors enjoy several benefits provided by the existence of organized security exchanges. These include:.
Providing a continuous market. A continuous market provides a series of continuous security prices. Establishing and publicizing fair security prices An organized exchange permits security prices to be set by competitive forces with the specific price of a security is determined in the manner of an auction.
Helping business raise new capital. Because a continuous secondary market exists, it is easier for firms to float, or issue, new security offerings at competitively determined prices. Selling Securities to the Public The investment banker is a financial specialist who acts as an intermediary in the selling of securities. He or she works for an investment banking firm house. Three basic functions are provided by the investment banker: 1.
He or she assumes the risk of selling a new security issue at a satisfactory profitable price. This is called underwriting. Typically, the investment banking house, along with the underwriting syndicate, actually buys the new issue from the corporation that is raising funds.
The syndicate group of investment banking firms then sells the issue to the investing public hopefully at a higher price than it paid. He or she provides for the distribution of the securities to the investing public. He or she advises firms on the details of selling securities. Distribution Methods Several distribution methods are available for placing new securities into the hands of final investors. In a negotiated purchase, the firm in need of funds contacts an investment banker and begins the sequence of steps leading to the final distribution of the offered securities.
In a competitive-bid purchase, the investment banker and underwriting syndicate are selected by an auction process. The syndicate willing to pay the issuing firm the greatest dollar amount per new security wins the competitive bid. This means that it will underwrite and distribute the issue. In this situation, the price paid to the issuer is not negotiated, instead it is determined by a sealed-bid process, much on the order of construction bids.
In a commission or best-efforts offering, the investment banker does not act as an underwriter. He or she attempts to sell the issue in return for a fixed commission on each security that is actually sold. Unsold securities are simply returned to the firm that was hoping to raise funds.
In a privileged subscription, the new issue is not offered to the investing public. It is sold to a definite and limited group of investors. Current stockholders are often the privileged group. In a Dutch auction, investors first put in bids giving the number of shares they would like to buy and the price they are willing to pay for them. Once the bids are in, they are ranked, and the selling price is calculated as the highest price that allows all the stock to be sold.
In a direct sale, the issuing firm sells the securities to the investing public without involving an investment banker. This is not a typical procedure. Private Debt Placements 1. Each year, billions of dollars of new securities are privately directly placed with final investors. In a private placement, a small number of investors purchase the entire security offering. Most private placements involve debt instruments. Large financial institutions are the major investors in private placements.
These include l life insurance firms, 2 state and local retirement funds, and 3 private pension funds. The advantages and disadvantages of private placements as opposed to public offerings must be carefully evaluated by management. The advantages include l greater speed than a public offering in actually obtaining the needed funds, 2 lower flotation costs than are associated with a public issue, and 3 increased flexibility in the financing contract.
Flotation Costs 1. The former is typically the larger. This absolute dollar difference is usually expressed as a percent of the gross proceeds. Many components comprise issue costs. The two most significant are l printing and engraving and 2 legal fees. SEC data reveal two relationships about flotation costs. Issue costs as a percent of gross proceeds for common stock exceed those of preferred stock, which in turn exceed those of bonds.
Total flotation costs per dollar raised decrease as the dollar size of the security issue increases. The short name for the act became the Sarbanes-Oxley Act of The Sarbanes-Oxley Act was passed as the result of a large series of corporate indiscretions.
The act holds corporate advisors like accountants, lawyers, company officers, and boards of directors who have access to or influence over company decisions strictly accountable in a legal sense for any instances of misconduct. Rates of Return in the Financial Markets. Rates of Return over Long Periods While interest rates are presently at historically low levels and stock prices have been extremely volatile since , over the longer run: 1.
The default-risk premium for long-term corporate bonds over long-term government bonds has between about 0. Large common stocks earned 3.
Interest Rate Levels in Recent Periods 1. Maturity-risk premium is another factor that affects interest rate levels ad arises even if security posses equal odds of default. The liquidity-risk premium needs to be identified and defined to help determine interest rate levels. Interest Rate Determinants in a Nutshell The real risk-free interest rate a required rate of return on a fixed-income security that has no risk in an economic environment of zero inflation.
Real and Nominal Rates of Interest 1. The real rate of interest is the difference in the nominal rate and the anticipated rate of inflation 2. It tells you how much more purchasing power you have. Practicing analysts and executives employ an approximation method to estimate the real rate of interest over a selected past time frame.
The Structure of Interest Rates 1. The term structure of interest rates changes over time, depending on the environment.
The particular term structure observed today may be quite different from the term structure 1 month ago and different still from the term structure 1 month from now. The term structure reflects observed rates or yields on similar securities, except for the length of time until maturity, at a particular moment in time. What Explains the Shape of the Term Structure? The liquidity preference theory suggests that investors require liquidity premiums additional returns to compensate them for buying securities that expose them to a greater risk of fluctuating interest rates.
The market segmentation theory is built on the notion that legal restrictions and personal preferences limit investment choices to certain ranges of maturities and therefore affect the rates of return required in each range. The money market consists of all institutions and procedures that accomplish transactions in short-term debt instruments issued by borrowers with typically high credit ratings. Examples of securities traded in the money market include U. Treasury bills, bankers acceptances, and commercial paper.
Notice that all of these are debt instruments. Equities are not traded in the money market. The money market is entirely an over-the-counter market. On the other hand, the capital market provides for transactions in long-term financial claims those claims with maturity periods extending beyond one year.
Trades in the capital market can take place on organized exchanges or over-the-counter. A continuous market. This means a series of continuous security prices is generated. Price changes between trades are dampened, reducing price volatility, and enhancing the liquidity of securities.
Establishing and publicizing fair security prices. Prices on an organized exchange are determined in the manner of an auction. Moreover, the prices are published in widely available media like newspapers. Unlike static PDF Foundations Of Finance 9th Edition solution manuals or printed answer keys, our experts show you how to solve each problem step-by-step.
It introduces students to fundamental economic concepts so they can better understand an increasingly complex world. This Pin was discovered by eric. Discover and save! Accounting Information Economics Finance. Buy, rent or sell.
Search for:.
0コメント