Chapter Nine The Capital Markets. Copyright © 2004 Pearson Education Canada Inc. Slide 9–2 Capital Markets Original maturity is greater than one year.

Chapter Nine

The Capital Markets

Copyright © 2004 Pearson Education Canada Inc. Slide 9–2

Capital Markets

• Original maturity is greater than one year

• Best known capital market securities:– Stocks and bonds

• Primary issuers of securities:– Federal and local governments

– Corporations

• Largest purchasers of securities:– You and me


Capital Market Trading

1. Primary market for initial sale (IPO)

2. Secondary market– Over-the-counter

– Organized exchanges (i.e., TSX)


Want to be listed on the TSX?

• You will need:

1. At least 300 investors

2. A minimum of 1 million shares traded publicly, with a market value of $4 million

3. Any shareholder with more than 10% of the stock must provide information on their experience in business

4. A Participating Organization of the TSX must sponsor the company


Want to be listed on the NYSE?

• You will need at least:

1. 2000 stockholders, each owning at least 100 shares

2. A minimum of 1.1 million shares traded publicly

3. Pretax earnings of $2.5 million at the time of listing

4. $2 million in pretax earning in each of the two prior years

5. A total of $100 million in market value of publicly traded shares


Canada Bonds


Canada Bond Interest Rates

• No default risk

• Very low interest rates


Figure 2: Interest Rate on Long-Term Canada Bonds and the Inflation Rate, 1976–2001

Canada Bond Interest Rates


Compare Long-Term Canada Bonds to 90-Day Treasury Bills


Municipal Bonds

1. Issued by local governments

2. Used to finance public interest projects

3. In the United States tax-free municipal interest rate = taxable interest rate (1 marginal tax rate)

4. Two types– General obligation bonds

– Revenue bonds

5. NOT default-free


Corporate Bonds

• Face value of $1000

• Pay interest semi-annually

• Can be redeemed anytime the issuer wishes

• Degree of risk varies with each bond

• Interest rate varies with level of risk


Corporate Bond Interest Rates


Characteristics of Corporate Bonds

• Registered Bonds

• Restrictive Covenants

• Call Provisions – Higher yield

– Sinking fund

– Interest of the stockholders

– Alternative opportunities

• Conversion


Types of Corporate Bonds

• Secured Bonds– Mortgage bonds

– Equipment trust certificates

• Unsecured Bonds– Debentures

– Subordinated debentures

– Variable-rate bonds

• Junk Bonds


Debt Ratings


Stock

1. Represents ownership in a firm

2. Earn a return in two ways– Price of the stock rises

over time

– Dividends are paid to the stockholder

3. Stockholders have claim on all assets

4. Right to vote for directors and on certain issues

5. Two types– Common stock

• Right to vote• Receive dividends

– Preferred stock• Receive a fixed dividend• Do not usually vote


S&P/TSX Composite


30 Stocks in the Dow Jones Industrial Average


Dow Jones Industrial Average, 1990-2002


Stock Market Indexes


Public Issues of Stocks and Bonds

• Two principal ways to sell securities to the public

– Investment bankers – Private placement

Chapter Nine The Capital Markets. Copyright © 2004 Pearson Education Canada Inc. Slide 9–2 Capital Markets Original maturity is greater than one year.

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