Fin. Management 5 - Financial Markets & Instruments

Fin. Management 5 - Financial Markets & Instruments -...

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Hult International Business School - Shanghai Financial Management April/May 2015 Handout 5 – Introduction to Financial Markets & Financial Instruments
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1-2 Financial Executive as Marketing Executive Financial executives need to raise money to finance the current operations and future growth of their companies. To do so they must market the future cash flows of their firm. Marketing entails the packaging of cash flows in order to fetch the highest price possible.
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1-3 Packaging Packaging cash flows involves security design. Designing securities requires knowledge of different financial instruments. Chapter 5 focuses on: financial instruments • markets
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1-4 Financial Markets Financial markets describe the distribution system by which cash-deficit entities engage in transactions with cash-surplus entities. Besides businesses, the entities in question include government agencies, universities, pension funds, endowments, individuals, commercial banks, insurance companies, etc. Money markets vs. capital markets distinguishes short-term vs. long-term contracts.
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1-5 Financial Instruments Companies do not face major constraints when choosing financial instruments. Instruments must appeal to investors and meet the needs of the company. SEC does not pass judgment on the merits of a security, although some states do have merit regulation (blue sky laws). SEC regulations require adequate disclosure before purchase.
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1-6 Three Variables When designing a financial instrument, a financial executive works with three variables: 1. Investors’ claims on future cash flows 2. Investors’ right to participate in company decisions 3. Investors’ claims on company assets in the event of liquidation
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1-7 How are Capital Markets Organized? Equity Capital Markets Debt Capital Markets IPO Follow-On Equity-Linked Investment Grade Bond High Yield Bond Senior Bank Debt Leveraged Finance
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1-8 -8- Financing Universe Spectrum of financing options is more/less a continuum , which can be broadly split into two “worlds”: Debt and Equity.
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