Lecture202 - Chapter 6 The Primary Markets I Overview A Def...

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Chapter 6: The Primary Markets I. Overview A. Def. The primary market involves the distribution of newly-issued securities to investors. Why take a company public? The founders of a company are endowed with a risky cash flow that often comprises the majority of their income. By selling a claim to a portion of this future cash flow the owners of this company can diversify their holdings. If the cash flow of this company is not highly correlated with the consumption stream of other investors, these other investors (the market) will place a higher value on the claim to the company’s future cash flow than the founders would. A public offering can raise funds for investment and provide a company with a currency (stock) for future acquisitions. B. Role of Investment Banker (IB) in primary market transactions. i. Advise the issuer on terms and timing. ii. Buy the securities from the issuer (underwrite).
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This note was uploaded on 04/12/2008 for the course ECON 435 taught by Professor Chabot during the Winter '08 term at University of Michigan.

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Lecture202 - Chapter 6 The Primary Markets I Overview A Def...

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