FIN4426_Chap_4_s - Chapter 4 Chapter 4 Organization and...

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Unformatted text preview: Chapter 4 Chapter 4 Organization and Functioning of Securities Markets – What Is A Market? – Primary Capital Markets – Secondary Financial Markets – Classification of U.S. Secondary Equity Markets – Detailed Analysis of Exchange Markets 4-2 What Is A Market? • Basic Concepts – It brings buyers and sellers together to aid in the transfer of goods and services – It does not need to have a physical location – The market does not necessarily have to own the goods and services – It can deal in any variety of goods and services – Both buyers and sellers benefit from the market 4-3 What Is A Market? • Characteristics of a Good Market – Availability of past transaction information • must be timely and accurate – Liquidity • Marketability • Price continuity • Depth – Low transaction costs: Internal efficiency – Rapid adjustment of prices to new information: External efficiency 4-4 What Is A Market? • Decimal Pricing – Prior to the initiation of changes in late 2000 that were completed in early 2001, common stocks in the United States were always quoted in fractions – Now U.S. equities are priced in decimals (cents), so the minimum spread can be in cents, resulting in lower transaction costs – The number of transaction has increased significantly while the average transaction size has reduced 4-5 What Is A Market? • Primary markets – Market where new securities are sold and funds go to issuing unit • Secondary markets – Market where outstanding securities are bought and sold by investors. The issuing unit does not receive any funds in a secondary market transaction 4-6 Primary Capital Markets • Government Bond Issues – Treasury Bills: Negotiable, non-interest bearing securities with original maturities of one year or less – Treasury Notes: Original maturities of 2 to 10 years – Treasury Bonds: Original maturities of more than 10 years – The sales of these bills, notes, and bonds are conducted through the Federal Reserve System auctions 4-7 Primary Capital Markets • Municipal Bond Issues – Sold by three methods • Competitive bid • Negotiation • Private placement – Underwriters sell the bonds to investors • Origination • Risk-bearing • Distribution 4-8 Primary Capital Markets • Corporate Bond and Stock Issues – Corporate bond issues are almost always sold through a negotiated arrangement with an investment banking firm that maintains a relationship with the issuing firm. – New Stock Issues • Seasoned new issues: New shares offered by firms that already have stock outstanding • Initial public offerings (IPOs): A firm selling its common stock to the public for the first time • These new issues are typically underwritten by investment bankers 4-9 The Underwriting Function • The investment banker purchases the entire issue from the issuer and resells the security to the investing public....
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This note was uploaded on 10/04/2011 for the course FINANCE FINANCE taught by Professor Don'tknow during the Spring '09 term at American Internation College.

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FIN4426_Chap_4_s - Chapter 4 Chapter 4 Organization and...

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