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IUB BUS-F 300 - Exam 2 Study Guide

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BUS-F 300 1st EditionExam # 2 Study GuideCapital Markets -Money markets: Short-term markets comprise securities with maturities of one year or less (securities traded are treasury bills, cds, and commercial paper)-Capital markets: Long-term markets that consist of securities having maturities greater than 1 year (bonds, common stock, preferred stock, and convertible securities)-Federally sponsored credit agencies: Governmental units that issue their securities on a separate basis from those securities sold directly by the US treasury (Fannie Mae and Freddie macFederal national mortgage association and Federal home loan mortgage corporation) -Municipal securities: state and local issues that are tax-exempt offerings-interest payments from securities issued by state and local governments are exempt from federal income taxes and income taxes levied by the state of issue-tend to be purchased by investors in high marginal tax brackets -Corporate bonds: debt instruments that have a fixed life and must be repaid at maturity. As bonds come due and are paid off, corporation usually replaces debt with new bonds. Corporate bond issuances have traditionally made up the majority of external financing transactions by corporations-Preferred stock: least used of all long-term corporate securities bc the dividend is not tax-deductible to the corporation Common stock: Companies seeking new equity capital sell common stock, has no maturity date -Internally generated funds: Represented by retained earnings and cash flow added backfrom depreciation-Financial intermediaries: Indirect investments, channel funds into the capital markets are specialized and diverse make investments in capital markets with the funds received from the household sector-Secondary trading: After a security is sold for the first time as an original offering, the security trades in its appropriate market among all kinds of investorsVery important to functioning financial markets bc proves liquidity to investors and keeps prices competitive among alternative security investments -NYSE has the most restrictive listing requirements -ECNs are also known as ATSs or alternative trading systems do not have an exchange floor or physical trading posts offer significant cost advantages NYSE and NASDAQ acquired the largest ECNs-NASDAQ is the largest exchange in the US by dollar trading volume-Market efficiency: Efficient when prices adjust rapidly to new information, there is a continuous market in which each successive trade is made at a price close to the previous price (the faster the price responds to new info and the smaller the differences in price changes, the more efficient the market, and the market can absorb large dollar amounts of securities without destabilizing the pricesKey variable affecting efficiency is the certainty of the income streammost efficient is US gov securities, with short term treasury bill market being exemplary -Efficient market hypothesis is stated in three forms – the weak, semi strong, and strong weak states that past price info is unrelated to future prices and trends cannot be predicated and taken advantage by investors semistrong states that prices currently reflect all public info strong states that all info, both private and public is immediately reflected in stock prices -Securities act of 1933Enacted after congressional investigations of the abuses present in the securities markets during the 1929 cash. Provides full disclosure of all pertinent investment info whenever a corporation sold a new issue of securities 1. all offerings except gov bonds and bank stocks that are to be sold in more than one state must be registered with the SEC2. registration must be filed 20 days in advance of the date of sale and must includedetailed corporate info3. all new issues of securities must be accompanied by a prospectus containing the same info appearing in registration statement 4. officers can be sued for penalties-Securities Exchange Act of 1934 created the SEC to enforce the securities laws Bonds-When you take a lot of cash flows and bring them back to present value, it is called discounting cash flows-A coupon payment is what looks like a routing interest payment from a corporate bondPV = FV/ (1 + r)^n-Corporate bonds: Bonds issued by corporations, the key features of which are par value,coupon rate, yield-to-maturity and years to maturity-Treasuries (US gov debt): 1. Treasury bills – short term securities that mature in a year or less2. Treasury notes – securities with maturities of between 1 year and 10 years, most popular form of US gov debt3. Treasury bonds – securities with maturities of between 10 years and 30 years -Junk bonds: Corporate bonds that have lower quality ratings and higher risk-Foreign bonds: most common are Eurobonds1. Yankee bond: debt issued in the US by non-US corps and denominated in dollars2. Samurai bond: Debt issued in Japan by non-Japanese corps and denominate in yen3. Dim sum bond: debt issued in Hong Kong but denominated in Chinese yen-Interest payments expensed before taxes which reduces taxes paid-After tax interest expense = interest rate(1-tax rate)-Why bonds?1. Interest payments expensed before taxes which reduces taxes paid2. Cost of bond capital is often lower than cost of equity capital3. Marketing bonds is usually easier and less costly than equity4. Equity holders like it when the firm also has some bonds outstanding-Maturity: how long before the bond must be paid off by the firm, or must be “retired” by the firm-“Face” or “par” value: how much the company will pay at maturity, usually $1000-Coupon: how much is paid annually as a fixed interestquoted as an annual valuebut always paid semi-annuallyUsed to have tabs at bottom of bonds like a flier, that’s why they are called coupons-Coupon rate-coupon/par value 5% is equivalent to $50While yields rise and fall, the coupon and coupon rate never change once the bond is issued -Yield-to-maturity, ytm, yield – Yield is the equivalent average annual return of this set of cash flows (collecting semi-annual payments)-Current yield: Coupon payment divided by “current price”coupon rate doesn’t change but the price of a bond goes up or down everyday depending on market supply and demand-Price of a bond rises or falls as it becomes relatively more or less attractive to investorsMajor factor: coupon rate relative to prevailing or


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IUB BUS-F 300 - Exam 2 Study Guide

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