pdfLecture chapter 5 international banking

pdfLecture chapter 5 international banking - MODULE 5...

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1 MODULE 5 – Investment Banking Introduction Investment banking is an important function of IB. Mainly, investment banks are engaged in underwriting securities to raise capital through initial public offerings. They also undertake mergers and acquisitions, whether hostile or friendly, for a fee. This module will explain the functions of investment banks, the types of securities they hold in their portfolios, risks they face, and regulatory issues. We will also look at some examples of financial engineering, which is a part of an investment bank’s functions and responsibilities. Objectives Upon successful completion of this module, the student should be able to: • Describe the function of an investment bank. • Examine and articulate the initial public offering activities by investment banks. • Describe loan syndication by an investment bank. • List the due diligence checklist. • Describe mergers and acquisitions and corporate financing. • Differentiate between the types of securities that are issued by an investment bank. • Articulate the activities of merchant banking. I nvestment banking activity evolved like every other aspect of IB. The financial collapse of 1929 led many people to believe that banking institutions recklessly packaged loans to the point that they compromised their reserve level and liquidity necessary for safeguarding the bank’s status as good-standing. With the Glass-Steagall Act, banks were prohibited from underwriting corporate securities and separated this function from their day to day orientation and responsibilities, such as loan packaging, deposit taking and providing saving accounts to their customers. With this law in place, we can easily assert that the foundation of investment banking activity was set in place, and evolved into what we see today. For example, investment banks perform an elaborate underwriting role for major corporations, from issuance of the security to its distribution, maintenance and maturity process, which completes their involvement in the said underwriting endeavor. An investment bank can purchase a security from an issuing company and sell it to the public. They can also distribute it to the public without purchasing it. A large percentage of an investment bank’s revenue is derived from participating in the role of underwriter. Also, investments banks provide consulting services to corporations for mergers and acquisitions, whether vertical or horizontal, and offer advice to start-up companies on organizational hierarchy. For further information, please see Footnote #1 . Furthermore, an investment banking institution’s functions can be described as underwriting and marketing securities, consulting and advisory services, currency trading, financial engineering, merchant banking, and bridge financing. Moreover, investment bankers are involved in raising capital in the capital market by selling their stock in the stock market, and often undertake venture capital activity. The Glass-Steagall was sunsetted in 1999 and was replaced by the
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This note was uploaded on 11/06/2011 for the course FIN 4634 taught by Professor Badet during the Fall '09 term at FIU.

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pdfLecture chapter 5 international banking - MODULE 5...

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