SG_CH02 - CHAPTER 2 The Financial Markets and Interest...

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CHAPTER 2 The Financial Markets and Interest Rates Orientation : This chapter considers the market environment in which long-term capital is raised. The underlying rationale for the existence of security markets is presented, investment banking services and procedures are detailed, private placements are discussed, and security market regulation is reviewed. Further discussions cover rates of return over long periods and recent periods, interest rate determinants, and theories of the term structure of interest rates. I. Components of the U.S. financial market system A. Public offerings can be distinguished from private placements . 1. The public (financial) market is an impersonal market in which both individual and institutional investors have the opportunity to acquire securities. a. A public offering takes place in the public market. b. The security-issuing firm does not meet (face-to-face) the actual investors in the securities. 2. In a private placement of securities, only a limited number of investors have the opportunity to purchase a portion of the issue. a. The market for private placements is more personal than its public counterpart. b. The specific details of the issue may actually be developed on a face-to-face basis among the potential investors and the issuer. 15
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B. Private placements and venture capital. 1. Private placements can involve issuing both debt and equity, and “venture capitalists” can play an active role in both. 2. For startup companies or companies in the early stages of business, as well as firms in “turnaround” situations, venture capital is a prime source of funds. The venture capitalist firm will frequently acquire a meaningful dollar state in the startup firm. C. Primary markets can be distinguished from secondary markets . 1. Securities are first offered for sale in a primary market. For example, the sale of a new bond issue, preferred stock issue, or common stock issue takes place in the primary market. These transactions increase the total stock of financial assets in existence in the economy. 2. Trading in currently existing securities takes place in the secondary market. The total stock of financial assets is unaffected by such transactions. D. The money market can be distinguished from the capital market . 1. The money market consists of the institutions and procedures that provide for transactions in short-term debt instruments which are generally issued by borrowers who have very high credit ratings. a. “Short-term” means that the securities traded in the money market have maturity periods of not more than one year. b. Equity instruments are not traded in the money market. c. Typical examples of money market instruments are (l) U.S. Treasury bills, (2) federal agency securities, (3) bankers’ acceptances, (4) negotiable certificates of deposit, and (5) commercial paper. 2.
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SG_CH02 - CHAPTER 2 The Financial Markets and Interest...

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