Purpose of the capital market (lecture 11)

Август 8, 2022

Главная
Финансы
Purpose of the capital market (lecture 11)

Содержание

2. Lecture 11. Capital Markets Murodullo Bazarov m.bazarov@wiut.uz ATB205 office hours: Tues 11:00-13:00
3. MEQ & RYL
4. Lecture Outline Purpose of the Capital Market Capital Market Participants Capital Market Trading Types of Bonds
5. Purpose of the Capital Market Original maturity is greater than one year, typically for long-term financing
6. Capital Market Participants Primary issuers of securities: Federal and local governments: debt issuers Corporations: equity and
7. Capital Market Trading 1. Primary market for initial sale (IPO) 2. Secondary market Over-the-counter Organized exchanges
8. Types of Bonds Bonds are securities that represent debt owed by the issuer to the investor,
9. Treasury Notes and Bonds The U.S. Treasury issues notes and bonds to finance its operations. The
10. Treasury Bond Interest Rates No default risk since the Treasury can print money to payoff the
11. Money Market Instruments: Treasury Bills
12. Municipal Bonds Issued by local, county, and state governments Used to finance public interest projects Tax-free
13. Municipal Bonds Suppose the rate on a corporate bond is 5% and the rate on a
14. Municipal Bonds Two types General obligation bonds Revenue bonds NOT default-free (e.g., Orange County California) Defaults
15. Municipal Bonds: Comparing Revenue and General Obligation Bonds Issuance of Revenue and General Obligation Bonds, 1984–2012
16. Corporate Bonds Typically have a face value of $1,000, although some have a face value of
17. Corporate Bonds: Interest Rates Corporate Bond Interest Rates, 1973–2012 (End of year)
18. Characteristics of Corporate Bonds Registered Bonds Replaced “bearer” bonds Internal revenue service (IRS) can track interest
19. Characteristics of Corporate Bonds Secured Bonds Mortgage bonds Equipment trust certificates Unsecured Bonds Debentures Subordinated debentures
20. Financial Guarantees for Bonds Some debt issuers purchase financial guarantees to lower the risk of their
21. Investing in Bonds Bonds are the most popular alternative to stocks for long-term investing. Even though
22. Investing in Bonds Bonds and Stocks Issued, 1983–2012
23. Investing in Stocks Represents ownership in a firm Earn a return in two ways Price of
24. Investing in Stocks: How Stocks are Sold Organized exchanges NYSE is best known, with daily volume
25. Investing in Stocks: Organized vs. OTC Organized exchanges (e.g., NYSE) Auction markets with floor specialists 25%
26. How the Market Sets Security Prices Generally speaking, prices are set in competitive markets as the
27. Errors in Valuation
28. Errors in Valuation: Dividend growth rates Stock Prices for a Security with D0 = $2.00, ke
29. Errors in Valuation: Required returns Stock Prices for a Security with D0 = $2.00, g =
30. Errors in Valuation Security valuation is not an exact science! Considering different growth rates, required rates,
31. Case: The 2007–2009 Financial Crisis and the Stock Market The financial crisis, which started in August
32. Case: 9/11, Enron and the Market Both 9/11 and the Enron scandal were events in 2001.
34. Скачать презентацию

Слайд 2

Lecture 11. Capital Markets
Murodullo Bazarov
m.bazarov@wiut.uz
ATB205
office hours: Tues 11:00-13:00

Слайд 3

MEQ & RYL

Слайд 4

Lecture Outline
Purpose of the Capital Market
Capital Market Participants
Capital Market Trading
Types

of Bonds
Treasury Notes and Bonds
Municipal Bonds
Corporate Bonds
Financial Guarantees for Bonds

Слайд 5

Purpose of the Capital Market
Original maturity is greater than one year,

typically for long-term financing or investments
Best known capital market securities:
Stocks and bonds

Слайд 6

Capital Market Participants
Primary issuers of securities:
Federal and local governments: debt issuers
Corporations:

equity and debt issuers
Largest purchasers of securities:
You and me
And other financial market players

Слайд 7

Capital Market Trading
1. Primary market for initial sale (IPO)
2. Secondary market
Over-the-counter
Organized

exchanges (i.e., NYSE)

Слайд 8

Types of Bonds
Bonds are securities that represent debt owed by the

issuer to the investor, and typically have specified payments on specific dates.
Types of bonds we will examine include long-term government bonds (T-bonds), municipal bonds, and corporate bonds.

Слайд 9

Treasury Notes and Bonds
The U.S. Treasury issues notes and bonds to

finance its operations.
The following table summarizes the maturity differences among the various Treasury securities.

Слайд 10

Treasury Bond Interest Rates
No default risk since the Treasury can print

money to payoff the debt
Very low interest rates, often considered the risk-free rate (although inflation risk is still present)

Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2013 (January of each year)

Слайд 11

Money Market Instruments: Treasury Bills

Слайд 12

Municipal Bonds
Issued by local, county, and state governments
Used to finance public

interest projects
Tax-free municipal interest rate = taxable interest rate × (1 − marginal tax rate)
Suppose the rate on a corporate bond is 9% and the rate on a municipal bond is 6.75%. Which should you choose?
Answer: Find the marginal tax rate:
6.75% = 9% × (1 – MTR), or MTR = 25%
If you are in a marginal tax rate above 25%, the municipal bond offers a higher after-tax cash flow.

Слайд 13

Municipal Bonds
Suppose the rate on a corporate bond is 5% and

the rate on a municipal bond is 3.7%. Which should you choose? Your marginal tax rate is 28%.
Find the equivalent tax-free rate (ETFR):
ETFR = 5% × (1 – MTR) = 5% × (1 – 0.28)
The ETFR = 3.6%. If the actual muni-rate is above this (it is), choose the municipal bond

Слайд 14

Municipal Bonds
Two types
General obligation bonds
Revenue bonds
NOT default-free (e.g., Orange County California)
Defaults

in 1990 amounted to $1.4 billion in this market
Read more examples:
http://www.municipalbonds.com/news/the-biggest-municipal-bond-disasters-of-all-time/

Слайд 15

Municipal Bonds: Comparing Revenue and General Obligation Bonds
Issuance of Revenue and

General Obligation Bonds, 1984–2012 (End of year)

Слайд 16

Corporate Bonds
Typically have a face value of $1,000, although some have

a face value of $5,000 or $10,000
Pay interest semi-annually
Cannot be redeemed anytime the issuer wishes, unless a specific clause states this (call option).
Degree of risk varies with each bond, even from the same issuer. Following suite, the required interest rate varies with level of risk.
The degree of risk ranges from low-risk (AAA) to higher risk (BBB). Any bonds rated below BBB are considered sub-investment grade debt.

Слайд 17

Corporate Bonds: Interest Rates
Corporate Bond Interest Rates, 1973–2012 (End of year)

Слайд 18

Characteristics of Corporate Bonds
Registered Bonds
Replaced “bearer” bonds
Internal revenue service (IRS) can

track interest income this way
Restrictive Covenants
Mitigates conflicts with shareholder interests
May limit dividends, new debt, ratios, etc.
Usually includes a cross-default clause
Call Provisions
Higher required yield
Mechanism to adhere to a sinking fund provision
Interest of the stockholders
Alternative opportunities
Conversion
Some debt may be converted to equity
Similar to a stock option, but usually more limited

Слайд 19

Characteristics of Corporate Bonds
Secured Bonds
Mortgage bonds
Equipment trust certificates
Unsecured Bonds
Debentures
Subordinated debentures
Variable-rate bonds
Junk

Bonds
Debt that is rated below BBB
Michael Milken developed this market in the mid-1980s, although he was subsequently convicted of insider trading
(http://www.businessinsider.com/michael-milken-life-story-2017-5)

Слайд 20

Financial Guarantees for Bonds
Some debt issuers purchase financial guarantees to lower

the risk of their debt.
The guarantee provides for timely payment of interest and principal, and are usually backed by large insurance companies.
https://www.investopedia.com/terms/c/creditdefaultswap.asp
As it turns out, not all guarantees actually make sense!
In 1995, JP Morgan created the credit default swap (CDS), a type of insurance on bonds.
In 2000, Congress removed CDSs from any oversight.
By 2008, the CDS market was over $62 trillion!
2008 losses on mortgages lead to huge payouts on this insurance

Слайд 21

Investing in Bonds
Bonds are the most popular alternative to stocks for

long-term investing.
Even though the bonds of a corporation are less risky than its equity, investors still have risk: price risk and interest rate risk,

Слайд 22

Investing in Bonds
Bonds and Stocks Issued, 1983–2012

Слайд 23

Investing in Stocks
Represents ownership in a firm
Earn a return in

two ways
Price of the stock rises over time
Dividends are paid to the stockholder
Stockholders have claim on all assets

Right to vote for directors and on certain issues
Two types
Common stock
Right to vote
Receive dividends
Preferred stock
Receive a fixed dividend
Do not usually vote

Слайд 24

Investing in Stocks: How Stocks are Sold
Organized exchanges
NYSE is best

known, with daily volume around 4 billion shares, with peaks at 7 billion.
“Organized” used to imply a specific trading location. But computer systems (ECNs) have replaced this idea.
Others include the ASE (US), and Nikkei, LSE, DAX (international)
Listing requirements exclude small firms
Over-the-counter markets
Best example is NASDAQ in history
Dealers stand ready to make a market
Today, about 3,000 different securities are listed on NASDAQ.
Important market for thinly-traded securities—securities that don’t trade very often. Without a dealer ready to make a market, the equity would be difficult to trade.

Слайд 25

Investing in Stocks: Organized vs. OTC
Organized exchanges (e.g., NYSE)
Auction markets with

floor specialists
25% of trades are filled directly by specialist
Remaining trades are filled through SuperDOT
Over-the-counter markets
Multiple market makers set bid and ask prices
Multiple dealers for any given security
Examples: The OTC Markets Group operates some of the most well-known networks, such as the Best Market (OTCQX), the Venture Market (OTCQB), and the Pink Open Market and NASDAQ in history

Слайд 26

How the Market Sets Security Prices
Generally speaking, prices are set in

competitive markets as the price set by the buyer willing to pay the most for an item.
The buyer willing to pay the most for an asset is usually the buyer who can make the best use of the asset.
Superior information can play an important role.
Consider the following three valuations for a stock with certain dividends but different perceived risk:
But, who perceives the lowest risk, is willing to pay the most and will determine the “market” price.

Слайд 27

Errors in Valuation

Слайд 28

Errors in Valuation: Dividend growth rates
Stock Prices for a Security with

D0 = $2.00, ke = 15%,
and Constant Growth Rates as Listed

Слайд 29

Errors in Valuation: Required returns
Stock Prices for a Security with D0

= $2.00, g = 5%, and Required Returns as Listed

Слайд 30

Errors in Valuation
Security valuation is not an exact science!
Considering different growth

rates, required rates, etc., is important in determining if a stock is a good value as an investment.

Слайд 31

Case: The 2007–2009 Financial Crisis and the Stock Market
The financial crisis,

which started in August 2007, was the start of one of the worst bear markets.
The crisis lowered “g” in the Gordon Growth model - driving down prices.
Also impacts ke - higher uncertainty increases this value, again lowering prices.
The expectations were still optimistic at the start of the crisis. But, as the reality of the severity of the crisis was understood, prices plummeted.

Слайд 32

Case: 9/11, Enron and the Market
Both 9/11 and the Enron scandal

were events in 2001.
Both should lower “g” in the Gordon Growth model - driving down prices.
Also impacts ke - higher uncertainty increases this value, again lowering prices.
In both cases the prices in the market fell. And subsequently rebounded as confidence in US markets returned.

Purpose of the capital market (lecture 11)

Содержание

Lecture 11. Capital MarketsMurodullo Bazarovm.bazarov@wiut.uz ATB205office hours: Tues 11:00-13:00

MEQ & RYL

Lecture Outline Purpose of the Capital MarketCapital Market ParticipantsCapital Market TradingTypes

Purpose of the Capital MarketOriginal maturity is greater than one year,

Capital Market ParticipantsPrimary issuers of securities:Federal and local governments: debt issuersCorporations:

Capital Market Trading1. Primary market for initial sale (IPO)2. Secondary marketOver-the-counterOrganized

Types of BondsBonds are securities that represent debt owed by the

Treasury Notes and BondsThe U.S. Treasury issues notes and bonds to

Treasury Bond Interest RatesNo default risk since the Treasury can print

Money Market Instruments: Treasury Bills

Municipal BondsIssued by local, county, and state governmentsUsed to finance public

Municipal BondsSuppose the rate on a corporate bond is 5% and

Municipal BondsTwo typesGeneral obligation bondsRevenue bondsNOT default-free (e.g., Orange County California)Defaults

Municipal Bonds: Comparing Revenue and General Obligation BondsIssuance of Revenue and

Corporate BondsTypically have a face value of $1,000, although some have

Corporate Bonds: Interest RatesCorporate Bond Interest Rates, 1973–2012 (End of year)

Characteristics of Corporate BondsRegistered BondsReplaced “bearer” bondsInternal revenue service (IRS) can

Characteristics of Corporate BondsSecured BondsMortgage bondsEquipment trust certificatesUnsecured BondsDebenturesSubordinated debenturesVariable-rate bondsJunk

Financial Guarantees for BondsSome debt issuers purchase financial guarantees to lower

Investing in BondsBonds are the most popular alternative to stocks for

Investing in BondsBonds and Stocks Issued, 1983–2012

Investing in StocksRepresents ownership in a firm Earn a return in

Investing in Stocks: How Stocks are SoldOrganized exchanges NYSE is best

Investing in Stocks: Organized vs. OTCOrganized exchanges (e.g., NYSE)Auction markets with

How the Market Sets Security PricesGenerally speaking, prices are set in