Chapter Nine The Capital Markets
Capital Markets <ul><li>Original maturity is  greater  than one year </li></ul><ul><li>Best known capital market securitie...
Purpose of the capital market <ul><li>By contrast to money market,  firms and government use capital market for long-term ...
Capital Market Trading <ul><li>Primary market for initial sale (IPO) </li></ul><ul><li>Secondary market </li></ul><ul><ul>...
Want to be listed on the NYSE? <ul><li>You will need at least: </li></ul><ul><ul><li>2000 stockholders, each owning at lea...
Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq
Capital Market Securities: Bonds <ul><li>represent a debt owed by issuer  (  what about stocks?) </li></ul><ul><li>Several...
Treasury Bonds
Treasury Bond Interest Rates <ul><li>No default risk </li></ul><ul><li>Very low interest rates </li></ul>
Treasury Bond Interest Rates Figure 9-3:  Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002
Compare 20-Year Treasury Bonds  to 90-Day Treasury Bills Figure 9-4:  Interest Rates on Treasury Bills and Treasury Bonds,...
What can we learn from those graphs? <ul><li>Short term bond  rates are usually lower than long term bonds rates </li></ul...
Municipal Bonds <ul><li>Issued by local, county, and state governments </li></ul><ul><li>Used to finance public interest p...
Comparing Revenue and General Obligation Bonds Figure 9-5:  Issuance of Revenue and General Obligation Bonds, 1984–2000 (E...
Corporate Bonds <ul><li>Face value of $1,000 </li></ul><ul><li>Pay interest semi-annually </li></ul><ul><li>Can be redeeme...
Sample Corporate Bond Figure 9-2:  Sohio/BP Corporate Bond
Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year)
Characteristics of Corporate Bonds <ul><li>Registered Bonds replace bearer bonds ( this is where “coupon payment” comes fr...
Types of Corporate Bonds <ul><li>Secured Bonds </li></ul><ul><ul><li>Mortgage bonds  secured by physical assets (for examp...
Debt Ratings
Trends in the Bond Market Figure 9-8:  Bonds and Stocks Issued, 1983–2000
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Chapter Nine The Capital Markets

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Chapter Nine The Capital Markets

  1. 2. Chapter Nine The Capital Markets
  2. 3. Capital Markets <ul><li>Original maturity is greater than one year </li></ul><ul><li>Best known capital market securities: </li></ul><ul><ul><li>Stocks and bonds </li></ul></ul><ul><li>Primary issuers of securities: </li></ul><ul><ul><li>Federal and local governments </li></ul></ul><ul><ul><li>Corporations </li></ul></ul><ul><li>Who is the largest purchasers of securities? </li></ul>
  3. 4. Purpose of the capital market <ul><li>By contrast to money market, firms and government use capital market for long-term investment to reduce the interest rate risk </li></ul><ul><ul><li>What is interest rate risk?. </li></ul></ul><ul><li>Why not use money market? </li></ul>
  4. 5. Capital Market Trading <ul><li>Primary market for initial sale (IPO) </li></ul><ul><li>Secondary market </li></ul><ul><ul><li>Over-the-counter (NASDAQ) </li></ul></ul><ul><ul><li>Organized exchanges (i.e., NYSE) </li></ul></ul>
  5. 6. Want to be listed on the NYSE? <ul><li>You will need at least: </li></ul><ul><ul><li>2000 stockholders, each owning at least 100 shares </li></ul></ul><ul><ul><li>A minimum of 1.1 million shares traded publicly </li></ul></ul><ul><ul><li>Pretax earnings of $2.5 million at the time of listing </li></ul></ul><ul><ul><li>$2 million in pretax earning in each of the two prior years </li></ul></ul><ul><ul><li>A total of $100 million in market value of publicly traded shares </li></ul></ul>
  6. 7. Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq
  7. 8. Capital Market Securities: Bonds <ul><li>represent a debt owed by issuer ( what about stocks?) </li></ul><ul><li>Several important characteristics about bonds </li></ul><ul><ul><li>Maturity </li></ul></ul><ul><ul><li>Interest (coupon) payment </li></ul></ul><ul><ul><li>Par value (face value) </li></ul></ul><ul><ul><li>Issuers. </li></ul></ul><ul><li>Long-term bonds: T-notes, T-bonds, muniicipal bonds and corporate bonds </li></ul>
  8. 9. Treasury Bonds
  9. 10. Treasury Bond Interest Rates <ul><li>No default risk </li></ul><ul><li>Very low interest rates </li></ul>
  10. 11. Treasury Bond Interest Rates Figure 9-3: Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002
  11. 12. Compare 20-Year Treasury Bonds to 90-Day Treasury Bills Figure 9-4: Interest Rates on Treasury Bills and Treasury Bonds, 1973–2002 (January of each year)
  12. 13. What can we learn from those graphs? <ul><li>Short term bond rates are usually lower than long term bonds rates </li></ul><ul><li>Short term rates are more volatile than long term rates because of expectation of inflation. </li></ul>
  13. 14. Municipal Bonds <ul><li>Issued by local, county, and state governments </li></ul><ul><li>Used to finance public interest projects </li></ul><ul><li>Tax-free municipal interest rate = taxable interest rate  (1  marginal tax rate) </li></ul><ul><li>Two types </li></ul><ul><ul><li>General obligation bonds </li></ul></ul><ul><ul><li>Revenue bonds </li></ul></ul><ul><li>NOT default-free </li></ul>
  14. 15. Comparing Revenue and General Obligation Bonds Figure 9-5: Issuance of Revenue and General Obligation Bonds, 1984–2000 (End of year)
  15. 16. Corporate Bonds <ul><li>Face value of $1,000 </li></ul><ul><li>Pay interest semi-annually </li></ul><ul><li>Can be redeemed anytime the issuer wishes </li></ul><ul><li>Degree of risk varies with each bond </li></ul><ul><li>Interest rate varies with level of risk </li></ul>
  16. 17. Sample Corporate Bond Figure 9-2: Sohio/BP Corporate Bond
  17. 18. Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year)
  18. 19. Characteristics of Corporate Bonds <ul><li>Registered Bonds replace bearer bonds ( this is where “coupon payment” comes from) </li></ul><ul><li>Restrictive Covenants reflect the agency problem </li></ul><ul><li>Call Provisions </li></ul><ul><ul><li>Higher yield </li></ul></ul><ul><ul><li>Sinking fund </li></ul></ul><ul><ul><li>Alternative opportunities </li></ul></ul><ul><li>Conversion </li></ul>
  19. 20. Types of Corporate Bonds <ul><li>Secured Bonds </li></ul><ul><ul><li>Mortgage bonds secured by physical assets (for example, real estate) </li></ul></ul><ul><ul><li>Equipment trust certificates secured by tangible non-real estate assets ( for example bonds, stocks etc.) </li></ul></ul><ul><li>Unsecured Bonds </li></ul><ul><ul><li>Debentures with indentures </li></ul></ul><ul><ul><li>Subordinated debentures have lower priority claim than debentures </li></ul></ul><ul><ul><li>Variable-rate bonds </li></ul></ul><ul><li>Junk Bonds </li></ul>
  20. 21. Debt Ratings
  21. 22. Trends in the Bond Market Figure 9-8: Bonds and Stocks Issued, 1983–2000

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