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Banks are institutions that agglomerate small quantities of money that
we want to have access to and obtain a profit from lending (secured
allocation) as opposed to investing (unsecured and variable value
Different investors have different appetite for risk. Demand side Short term loans allow to even out variability;
Long term loans allow to leverage capital... That is, if you can take a
loan, and the proceeds of your long term investment are greater than
the principal and interest on the loan, you basically have made more
money on the same capital investment!!!
money Long term debt instrument issued by a
corporation or government entity.
BOND Bonds: Concepts
Bonds: Coupon Rate/Interest Rate
Convertible Equity Capital
Money raised from within the firm or through the
sale of ownership in the firm
sale Retained earnings
New equity Advantages of new equity Powerful motivational device (as options);
Offers strong upsides to buyers;
Easy to obtain in bull markets. Disadvantages of new equity Expensive (taxation and need to post dividends)
Weakening of retained earnings
Loss of control Two Classes of Stock
Common Stock -- The most basic form; holders
have the right to vote for the board of directors
and share in the profits if dividends are
Preferred Stock -- Owners are given preference
in the payment of company dividends before
common stock div...
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- Spring '06