Chapter 19 – Securities Markets

Chapter 19 – Securities Markets - Chapter...

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Chapter 19 – Securities Markets - The Function of Securities Markets o Securities markets are financial marketplaces for stocks and bonds Assist businesses in finding long-term funding to finance capital needs, such as beginning operations, expanding business, etc. Provide for private investors a place to buy and sell securities Divided into Primary and Secondary Markets Primary Markets handle sales of new securities Secondary Markets handle trading of securities between investors with the proceeds of a sale going to the investor, not the corporation whose stock is sold Initial Public Offering (IPO) – The first public offering of a corporation’s stock o The Role of Investment Bankers Investment Bankers are specialists who assist in the issue and sale of new securities They also underwrite new issues of bonds or stocks; they buy an entire bond at a discount from a company and then sell it to a private investor or company at full price Institutional Investors are large organizations (e.g. pension funds, mutual funds, insurance companies) that invest their own funds or the funds of others - Debt Financing by Selling Bonds o Bond – corporate certificate indicating that a person has lent money to a firm o Learning the Language of Bonds Interest – The payment the issuer of the bond makes to the bondholders for use of the borrowed money (also called coupon rate) Interest rate varies based on various factors such as the state of the economy, the reputation of the company issuing the bond Maturity Date – The exact date the issuer of a bond must pay the principal to the bondholder Advantages of Bonds Bondholders are creditors, not owners. Management maintains control over the firm’s operations Interest paid on bonds is tax deductible to firm issuing bond Bonds are a temporary source of funding Disadvantages of Bonds Bonds increase debt (long-term liability) Paying interest on bonds is a legal obligation The face value of bonds must be repaid on the maturity date
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This note was uploaded on 02/28/2010 for the course AEM 2200 taught by Professor Perez,p.d. during the Spring '07 term at Cornell.

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Chapter 19 – Securities Markets - Chapter...

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