Chapter 12: Capital Markets Outline: Overview of Capital Markets Debt Financing Equity (Stock) Securities Managing Capital Market Investments Valuation.
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Chapter 12: Capital Markets
Outline: Overview of Capital Markets Debt Financing Equity (Stock) Securities Managing Capital Market Investments Valuation of Long-Term Securities
Which of the following describes a bond issue, lists collateral, makes representations and warranties, specifies covenants, specifies terms by which a firm will provide funds for redemption and sets forth interest payment schedules or call provisions?a) Guaranteesb) Indenturesc) Put provisions
Finance specific assets pledged as security; usually include substantial covenants: Assets involved Right to issue additional bonds Use of second mortgages Sinking-fund, reporting, ratio requirements Prepayment terms Restrictions on dividend policy
Unsecured bonds
General claims against assets or cash flows; may be issued on subordinated basis.
Convertible bonds
Corporate securities are convertible into common/preferred stocks at a fixed price.
Income bonds Pay interest only if company has profits, reducing risk for company
Collateral trust bonds Backed by securities of other companies that are owned by the issuing company
Equipment trust certificates
Bonds secured with movable equipment (e.g., trucks, trains)
Index bonds Interest rate tied to economic index; used in countries with high inflation
Economic development bonds
Issued by underdeveloped countries or by World Bank or International Monetary Fund
Tax increment financing (TIF) bonds
Used primarily for local financing; municipality uses all or a portion to finance project
Tender option bonds Allow the holder to sell them back to the issuer
Discussion Question
A bond that is denominated in U.S. dollars and issued in India by a U.K. company would be an example of aa) foreign bond.b) Eurobond.c) global bond.d) multicurrency bond.
What are some of the benefits of using depository receipts (DRs), especially for companies in countries with limited financial markets?Answer: They help increase global trade, including transaction
volumes on both local and foreign markets. They offer greater exposure and the
opportunity to raise capital on a global basis to companies in smaller countries.
They help reduce market inefficiencies, especially in emerging markets, by allowing for easier global investment in those markets.
Capital Asset Pricing Model (CAPM) Beta (ß) measures the risk of a particular stock relative to overall
market. The market has a beta of one, so stocks with a beta > one are more risky than the market; those with a beta < one are less risky than the market. Risk-free assets (T-bills) have a beta of 0. Assume that the T-bill rate is 2%, the expected rate of return on the market portfolio is 8%, and the beta for this stock is 1.5 (greater risk than average).