FIN 345 1st Edition Lecture 5Review of Last Lectures1. Financial Markets Definition Breakdowna. A system comprised of individuals, institutions (firms, government), with procedures, financial instrumentsb. Brings together borrowers and savers (investors)c. When a borrower goes into the market they are sacrificing future incomed. When a saver goes into the market there is no guarantee that income will become larger, but they are sacrificing current income for that hopee. The investment banker is the group that works with the firm to help them raise capital by floating bonds or new issues of stock2. The Physical Stock Exchangea. NYSE Membersi. Trading floor brokers1. House brokers employed by brokerage firmsii. Designated market makers (specialists)1. Make a marketiii. Supplemental liquidity providers (SLPs)1. Deal with high-volume trades2. Regulation to help the investors; competition is healthy, insider doesn’t get the edge, no ‘cheating’b. Listing Requirementsi. Quantitative and qualitative characteristics a firm must possess to be listed on an exchangeii. Vary by exchangeiii. Minimum number of shareholders, number of public shares, market value of public shares, pre-tax income, etc.c. Organized Investment Networksi. Over-the-counter market (OTC): collection of brokers and dealers connected electronically. Provides for trading in securities not listed on the physical and other organized exchanges1. Dealers hold inventory and make a market2. Brokers act as agents in bringing together dealers with investors3. Electronic network provides communications link3. NASDAQ4. EfficiencyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. Economic Efficiency: Dollars are allocated to their optimal use at their lowest costs. Transaction costs associated with buying and selling are efficient.b. Information Efficiency: Pertains to price of stock in the market – impacts the price. 3 levels: strong form (all information is available), semi-strong and weak.5. Types of marketsa. Money Markets: short termb. Capital Markets: long termc. Debt Markets: temporary debt. All instruments in this market have maturity dated. Primary Market: where securities are issued initially e. Secondary Market: where securities are traded after they’ve already been issued6. IPO: Initial public offering AKA going publicOutline of Current Lecture1. Investment banking processa. Help corporations design securities with the features that are most attractive toinvestors given existing market conditionsb. Generally buy these securities from the corporationsc. Then resell the securities to investors (savers)2. Raising Capital: a. Stage I Decisions i. Dollars to be raisedii. Type of securities usediii. Competitive bid or negotiated deal1. Trying to sell to the investment bankers iv. Selection of an investment bankerb. Stage II Decisionsi. Reevaluating the initial decisionsii. Best efforts or underwritten issues1. Try their best to sell as much as they can but they don’t have to; no guarantee on selling all of the sharesiii. Issuance (flotation) costs1. Amount of issue=(NP+Other costs)(1-F)2. NP means Net proceeds or amount needed3. F means Flotation (issuance) costs in decimal formiv. Setting the offering