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Chapter Nine The Capital Markets
Capital Markets <ul><li>Original maturity is  greater  than one year </li></ul><ul><li>Best known capital market securitie...
Capital Market Trading <ul><li>Primary market for initial sale (IPO) </li></ul><ul><li>Secondary market </li></ul><ul><ul>...
Want to be listed on the NYSE? <ul><li>You will need at least: </li></ul><ul><ul><li>2000 stockholders, each owning at lea...
Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq
Treasury Bonds
Treasury Bond Interest Rates <ul><li>No default risk </li></ul><ul><li>Very low interest rates </li></ul>
Treasury Bond Interest Rates Figure 9-3:  Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002
Compare 20-Year Treasury Bonds  to 90-Day Treasury Bills Figure 9-4:  Interest Rates on Treasury Bills and Treasury Bonds,...
Municipal Bonds <ul><li>Issued by local, county, and state governments </li></ul><ul><li>Used to finance public interest p...
Comparing Revenue and General Obligation Bonds Figure 9-5:  Issuance of Revenue and General Obligation Bonds, 1984–2000 (E...
Corporate Bonds <ul><li>Face value of $1,000 </li></ul><ul><li>Pay interest semi-annually </li></ul><ul><li>Can be redeeme...
Sample Corporate Bond Figure 9-2:  Sohio/BP Corporate Bond
Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year)
Characteristics of Corporate Bonds <ul><li>Registered Bonds </li></ul><ul><li>Restrictive Covenants </li></ul><ul><li>Call...
Types of Corporate Bonds <ul><li>Secured Bonds </li></ul><ul><ul><li>Mortgage bonds </li></ul></ul><ul><ul><li>Equipment t...
Debt Ratings
Trends in the Bond Market Figure 9-8:  Bonds and Stocks Issued, 1983–2000
Stock <ul><li>Represents ownership  in a firm  </li></ul><ul><li>Earn a return in two ways </li></ul><ul><ul><li>Price of ...
Sample Corporate Stock Certificate Figure 9-9:  Wien Consolidated Airlines Stock
Stock Prices
30 Stocks in the Dow Jones  Industrial Average
Stock Market Indexes Graph of Dow Jones Industrial Average http://finance.yahoo.com/q?s=^DJI&d=c&k=c1&a=v&p=s&t=my&1=on&z=...
Public Issues of Stocks and Bonds <ul><li>Two principal ways to sell securities  to the public </li></ul><ul><ul><li>Inves...
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Chapter Nine The Capital Markets

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Chapter Nine The Capital Markets

  1. 2. Chapter Nine The Capital Markets
  2. 3. Capital Markets <ul><li>Original maturity is greater than one year </li></ul><ul><li>Best known capital market securities: </li></ul><ul><ul><li>Stocks and bonds </li></ul></ul><ul><li>Primary issuers of securities: </li></ul><ul><ul><li>Federal and local governments </li></ul></ul><ul><ul><li>Corporations </li></ul></ul><ul><li>Largest purchasers of securities: </li></ul><ul><ul><li>You and me </li></ul></ul>
  3. 4. Capital Market Trading <ul><li>Primary market for initial sale (IPO) </li></ul><ul><li>Secondary market </li></ul><ul><ul><li>Over-the-counter </li></ul></ul><ul><ul><li>Organized exchanges (i.e., NYSE) </li></ul></ul>
  4. 5. Want to be listed on the NYSE? <ul><li>You will need at least: </li></ul><ul><ul><li>2000 stockholders, each owning at least 100 shares </li></ul></ul><ul><ul><li>A minimum of 1.1 million shares traded publicly </li></ul></ul><ul><ul><li>Pretax earnings of $2.5 million at the time of listing </li></ul></ul><ul><ul><li>$2 million in pretax earning in each of the two prior years </li></ul></ul><ul><ul><li>A total of $100 million in market value of publicly traded shares </li></ul></ul>
  5. 6. Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq
  6. 7. Treasury Bonds
  7. 8. Treasury Bond Interest Rates <ul><li>No default risk </li></ul><ul><li>Very low interest rates </li></ul>
  8. 9. Treasury Bond Interest Rates Figure 9-3: Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002
  9. 10. Compare 20-Year Treasury Bonds to 90-Day Treasury Bills Figure 9-4: Interest Rates on Treasury Bills and Treasury Bonds, 1973–2002 (January of each year)
  10. 11. Municipal Bonds <ul><li>Issued by local, county, and state governments </li></ul><ul><li>Used to finance public interest projects </li></ul><ul><li>Tax-free municipal interest rate = taxable interest rate  (1  marginal tax rate) </li></ul><ul><li>Two types </li></ul><ul><ul><li>General obligation bonds </li></ul></ul><ul><ul><li>Revenue bonds </li></ul></ul><ul><li>NOT default-free </li></ul>
  11. 12. Comparing Revenue and General Obligation Bonds Figure 9-5: Issuance of Revenue and General Obligation Bonds, 1984–2000 (End of year)
  12. 13. Corporate Bonds <ul><li>Face value of $1,000 </li></ul><ul><li>Pay interest semi-annually </li></ul><ul><li>Can be redeemed anytime the issuer wishes </li></ul><ul><li>Degree of risk varies with each bond </li></ul><ul><li>Interest rate varies with level of risk </li></ul>
  13. 14. Sample Corporate Bond Figure 9-2: Sohio/BP Corporate Bond
  14. 15. Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year)
  15. 16. Characteristics of Corporate Bonds <ul><li>Registered Bonds </li></ul><ul><li>Restrictive Covenants </li></ul><ul><li>Call Provisions </li></ul><ul><ul><li>Higher yield </li></ul></ul><ul><ul><li>Sinking fund </li></ul></ul><ul><ul><li>Interest of the stockholders </li></ul></ul><ul><ul><li>Alternative opportunities </li></ul></ul><ul><li>Conversion </li></ul>
  16. 17. Types of Corporate Bonds <ul><li>Secured Bonds </li></ul><ul><ul><li>Mortgage bonds </li></ul></ul><ul><ul><li>Equipment trust certificates </li></ul></ul><ul><li>Unsecured Bonds </li></ul><ul><ul><li>Debentures </li></ul></ul><ul><ul><li>Subordinated debentures </li></ul></ul><ul><ul><li>Variable-rate bonds </li></ul></ul><ul><li>Junk Bonds </li></ul>
  17. 18. Debt Ratings
  18. 19. Trends in the Bond Market Figure 9-8: Bonds and Stocks Issued, 1983–2000
  19. 20. Stock <ul><li>Represents ownership in a firm </li></ul><ul><li>Earn a return in two ways </li></ul><ul><ul><li>Price of the stock rises over time </li></ul></ul><ul><ul><li>Dividends are paid to the stockholder </li></ul></ul><ul><li>Stockholders have claim on all assets </li></ul><ul><li>Right to vote for directors and on certain issues </li></ul><ul><li>Two types </li></ul><ul><ul><li>Common stock </li></ul></ul><ul><ul><ul><li>Right to vote </li></ul></ul></ul><ul><ul><ul><li>Receive dividends </li></ul></ul></ul><ul><ul><li>Preferred stock </li></ul></ul><ul><ul><ul><li>Receive a fixed dividend </li></ul></ul></ul><ul><ul><ul><li>Do not usually vote </li></ul></ul></ul>
  20. 21. Sample Corporate Stock Certificate Figure 9-9: Wien Consolidated Airlines Stock
  21. 22. Stock Prices
  22. 23. 30 Stocks in the Dow Jones Industrial Average
  23. 24. Stock Market Indexes Graph of Dow Jones Industrial Average http://finance.yahoo.com/q?s=^DJI&d=c&k=c1&a=v&p=s&t=my&1=on&z=m&q=l
  24. 25. Public Issues of Stocks and Bonds <ul><li>Two principal ways to sell securities to the public </li></ul><ul><ul><li>Investment bankers </li></ul></ul><ul><ul><li>Private placement </li></ul></ul>

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