Financialinstruments金融工具.pptx

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1、3.FINANCIAL MARKETSAND INSTRUMENTSFinancialinstruments金融工具共45页，您现在浏览的是第1页!Financial markets&instrumentsBusinesses raise money to finance current operations as well as for future growth Money is raised In financial markets(capital markets and money markets)By issuing financial instruments(also called

2、 securities)which give the holders claims on future cash flows of the business2Financialinstruments金融工具共45页，您现在浏览的是第2页!Financial marketsFinancial markets describes the distribution system by which cash-deficit entities engage in transactions with cash-surplus entities.Besides businesses,participants

3、 include government agencies,pension funds,endowments,individuals,mercial banks,insurance panies Regulated by Securities&Exchange Commission Capital markets deal with long term instruments like stocks and bonds while money markets deal with short-term instruments with maturity less than one year suc

4、h as mercial paper.3Financialinstruments金融工具共45页，您现在浏览的是第3页!Financial instrumentsInstruments must appeal to investors and meet the needs of the pany.They are designed keeping in mind Investors claims on future cash flowsInvestors right to participate in pany decisionsInvestors claims on pany assets

5、in the event of liquidationSEC regulations require adequate disclosure before purchase.4Financialinstruments金融工具共45页，您现在浏览的是第4页!BONDSFixed ine security interest paid periodically Repayment of principal at maturity.Bonds are sold to the public in small increments,such as$1000,and can be traded on an

6、exchange after issue.Yield(return with reference to market price)inversely related to market price5Financialinstruments金融工具共45页，您现在浏览的是第5页!Call Provisions提前赎回条款Right to retire bonds prior to maturity.Investors require a premium for call provisions.Call price is typically a modest premium above par.D

7、elayed call prevents retirement before some date.Call options help panies take advantage of declines in interest rates and rearrange capital structure6Financialinstruments金融工具共45页，您现在浏览的是第6页!Rights in Liquidation清偿权利Rights of absolute priorityGovernment in respect to taxes past dueSenior creditorsGe

8、neral creditorsSubordinated creditorsPreferred shareholdersCommon shareholders7Financialinstruments金融工具共45页，您现在浏览的是第7页!Bonds Issuers perspectiveAdvantages:Lower cost of fundsInterest is tax deductibleNo loss of controlDisadvantages:Interest payment mandatoryRedemption cash outflows8Financialinstrume

9、nts金融工具共45页，您现在浏览的是第8页!TABLE 5-1 Rate of Return on Selected U.S.Securities TABLE 5-1 Rate of Return on Selected U.S.Securities 1900-20071900-20079Financialinstruments金融工具共45页，您现在浏览的是第9页!Junk BondsInvestment grade is“BBB”and above.Junk bonds are speculative or high yield bonds and are below investmen

10、t grade.Junk bond market is an alternative to bank and insurance pany loans for smaller,less prominent panies.Junk bonds have been used to finance mergers and acquisitions.10Financialinstruments金融工具共45页，您现在浏览的是第10页!Risk and return What is the expected rate of return on equity?Rate of return=Dividend

11、 yield+capital appreciation =Div/Mkt price +%change in share priceRisk return tradeoff:Higher the risk in an investment,higher the expected returns Equity investors expect a risk premium to pensate for the enhanced risk So return on equity=Risk free rate+Risk premiumRisk free rate taken as Govt.Bond

12、 rateRisk premium(Table 5-1)=11.6 -5.3=6.3%11Financialinstruments金融工具共45页，您现在浏览的是第11页!Common stock(contd)Advantages to issuer*Dividend payment not mandatory*No redemption cash outflows*Higher equity means better borrowing ability Disadvantages *Costlier source of funds than debt *Dilution in control

13、 *Dividends not tax deductible(unlike interest)12Financialinstruments金融工具共45页，您现在浏览的是第12页!Higher priority over mon stockholders in payment of dividends and in repayment of capitalAnnual fixed dividend at coupon rate x par valueDividend is discretionaryCumulative dividends featureDividend not tax ded

14、uctible for issuerNo voting rights except in matters which concern themPREFERRED STOCK13Financialinstruments金融工具共45页，您现在浏览的是第13页!MARKET CHANNELSMarket Channels for raising fundsPrivate equityVenture capitalInitial public offers(IPOs)and seasoned equity issues(SEOs)Shelf registrationPrivate placement

15、International markets14Financialinstruments金融工具共45页，您现在浏览的是第14页!Private Equity PartnershipsStructured as limited partnerships with a specified duration such as 10 years.General partner is the private equity firm,which raises a pool of money from limited partners,such as institutional investors and i

16、nsurance panies.Limited partners have limited liability.Typical fee structure is 2 and 20,the sum of a management fee and carried interest based on capital appreciation.Induce managers to create value over long run15Financialinstruments金融工具共45页，您现在浏览的是第15页!Venture capital-featuresLong term equity fi

17、nance high stakes.Returns through capital gains at the time of exit by selling out equity holdings at high premiums.Selective-generally seek above average returns.Generally financing of new/untried technology,new/no track record promotersNot only financing but also active role in mgmt.Medium to long

18、 term investment horizon.Incentives to promoters on performance.16Financialinstruments金融工具共45页，您现在浏览的是第16页!FIGURE 5-3 Venture Capital Investment in U.S.CompaniesFIGURE 5-3 Venture Capital Investment in U.S.Companies17Financialinstruments金融工具共45页，您现在浏览的是第17页!IPO RisksManaging underwriter advises the

19、pany on security designregisters the issue with the SEC(30-90 days)orchestrates a“road show”assembles an underwriting syndicate who engage in book buildingSyndicate acts as wholesaler.Offer price set hours before stock goes public.Company bears price risk during the registration process;syndicate be

20、ars risk associated with unsold shares,which they cannot sell above the offer price.18Financialinstruments金融工具共45页，您现在浏览的是第18页!Private PlacementCorporations can avoid registering with SEC by placing the securities privately with institutional investors.The private placement market is about half the

21、size of the public market,excluding bank loans.Attractive option if public investors not especially receptive for reasons of plexity.Advantages to pany are quicker and easier to negotiate,can be custom tailored to specific needs Disadvantage is that as unregistered securities they cannot be traded o

22、n financial markets less liquidRule 144A now allows for trading of privately placed securities among institutional investors.19Financialinstruments金融工具共45页，您现在浏览的是第19页!ComparisonIPO Pvt.PlmntCapital raisedHighLesserDistributionWidely distributedLimitedDilution of ControlHighLowerFloatation cost&time

23、HighLower20Financialinstruments金融工具共45页，您现在浏览的是第20页!Efficiency in DegreesA market is weak-form efficient when prices fully reflect all information about past pricesSemi-strong form efficient when prices fully reflect all publicly available informationstrong form efficient when prices fully reflect a

24、ll information,public or private.21Financialinstruments金融工具共45页，您现在浏览的是第21页!Conclusions to DrawApart from market sentiment,managers can use private information about their own panies in making timing decisions.Pricing decisions in practice are based on Market value Fair valuePrice discovery thro boo

25、k building 22Financialinstruments金融工具共45页，您现在浏览的是第22页!Forward contractsYou can buy in spot market today for immediate delivery spot contract.You can contract today at a predetermined price for future delivery forward contract.By locking in a price today,you can avoid price riskAn exporter with 1 mil

26、lion receivable in 90 days,can sell (an importer with a payable can buy)at a predetermined rate in the forward marketFutures contracts are similar to forwards except that they are exchange traded(while forwards are bilateral)23Financialinstruments金融工具共45页，您现在浏览的是第23页!Option contractsFor a call optio

27、nIn the money:When the spot exceeds the strike At the money:When the spot=strikeOut of the money:When spot is less than strikeFor a put optionIn the money:When the spot is less than strike At the money:When the spot=StrikeOut of the money:When the spot exceeds strike24Financialinstruments金融工具共45页，您现

28、在浏览的是第24页!Types of instrumentsDebt instruments offer fixed claims.Equity offers residual claims.Hybrids such as convertible debt bine both.Derivatives such as forwards,futures and options provide a hedge against risk25Financialinstruments金融工具共45页，您现在浏览的是第25页!Bond characteristicsPar valueMaturity dat

29、eCoupon rateCurrent yield vs.yield to maturity(YTM)Sinking fund for periodic repayment of principalVariable rate vs.fixed rate bonds26Financialinstruments金融工具共45页，您现在浏览的是第26页!Covenants契约Contractual terms to protect bondholders by impacting management decisions.Examples:Lower limit on current ratioUp

30、per limit on D/E ratioRequired approval by bondholders before major acquisition or sale of assetsBondholders have no direct say in a pany unless it defaults on its interest,sinking fund,or covenant obligations.27Financialinstruments金融工具共45页，您现在浏览的是第27页!Secured CreditorsSecured credit involves collat

31、eral.In liquidation,proceeds from the sale of collateral only go to the secured creditor up to the amount of the secured credit.Any residual goes into the pool shared by the other investors.If the sale of collateral is insufficient,the secured creditor bees a general creditor for the balance.28Finan

32、cialinstruments金融工具共45页，您现在浏览的是第28页!Bonds investors perspectiveFixed ine,no capital appreciationConvertible bonds seek to provide bothRisk return tradeoff Lesser risk than equity,lower returnsAnnualized returns over 10 yrs for Barclays Bond Index 7.6%vs.S&P 500 10.4%Also refer Table 5-1 Real vs.nomi

33、nal returnsir=(1+in)/(1+p)-1 whereir=Real return,in =Nominal return,p=Inflation rate 29Financialinstruments金融工具共45页，您现在浏览的是第29页!Bond ratingsExpression of the opinion of the rating agency on the creditworthiness of the borrower Measures credit risk/default riskCredit rating agencies-S&P,D&B,MoodysAAA

34、 High creditworthinessBBB AdequateCCC -PoorD Default Bond ratings and interest rates30Financialinstruments金融工具共45页，您现在浏览的是第30页!EQUITY or COMMON STOCKResidual ine securitiesRepresent ownership securities-proportionate to shareholdingRight to control-Voting rightsShareholders are represented through a

35、 board of directors,through which they exercise control.Right in liquidation residual claim over assetsRiskier than debt instruments31Financialinstruments金融工具共45页，您现在浏览的是第31页!Common stock(contd)Advantages to investor *Higher returns than debt*Liquidity*Wealth sharingDisadvantages to investor *Higher

36、 risk *Dividend payment not mandatory32Financialinstruments金融工具共45页，您现在浏览的是第32页!A note on retained earningsReadily available source of funds internally(internal equity)No issue costsNo dilution in controlReflects the robustness of panys health and reduces dependance on outside fundingThe only point

37、to be remembered is that retained earnings also has a cost in terms of opportunity cost to investors33Financialinstruments金融工具共45页，您现在浏览的是第33页!Preferred stock(contd)To the investor:Lesser risk,but lesser returns and less liquid than mon stock To the issuer:Lesser cost,dividend payment not mandatory(

38、but not tax deductible),no loss of control 34Financialinstruments金融工具共45页，您现在浏览的是第34页!Private Equity FinancingSource of funds for startups,new or small businesses viewed as too risky for bank lending and too small to attract the attention of investors in public markets.Funding done by strategic inve

39、stors,venture capital firms who provide seed money with potential acquisition on their minds.35Financialinstruments金融工具共45页，您现在浏览的是第35页!Venture capitalA venture capital pany is a financing institution which joins an entrepreneur as a co-promoter in a project and shares the risks and rewards of the e

40、nterprise.Projects are generally high risk with potential high rewards.Sought by new/untried businesses having little/no access to public capital/bank loans.36Financialinstruments金融工具共45页，您现在浏览的是第36页!Exit routeGoing publicSale of shares to promoter.Sale of pany to another pany management buyin or bu

41、yout.Selling to a new investor.Liquidation37Financialinstruments金融工具共45页，您现在浏览的是第37页!Initial Public Offerings (IPOs)When panies raise capital for the first time by issuing new shares Seasoned equity offerings(SEOs)refer to issue of new shares by a pany that is already publicly traded(already made an

42、 IPO)Company assesses proposals from investment banks and chooses one managing underwriter38Financialinstruments金融工具共45页，您现在浏览的是第38页!Shelf registrationShelf registration is a general purpose registration giving broad terms of the securities to be issued,good up to two years,that allows the firm to g

43、et quick approval A single underwriter often buys the entire issue.Cuts the time lag from several months to a few days Competitive bids lower the issue costs.39Financialinstruments金融工具共45页，您现在浏览的是第39页!Issue CostsFor privately negotiated transactions,issue cost amounts to the investment banking fee.F

44、or public issues,there are also legal,accounting,and printing fees.Cost parisons2.2%for straight debt.3.8%for convertible bonds.7.1%for secondary offerings.11%for IPOs.40Financialinstruments金融工具共45页，您现在浏览的是第40页!Efficient MarketsIssues in raising new capitalTimingPricingMarket efficiency is with refe

45、rence to how quickly prices in petitive markets respond to new informationEfficient market is one where prices adjust rapidly to new information and current prices fully reflect available information 41Financialinstruments金融工具共45页，您现在浏览的是第41页!Empirical evidence-implicationMarkets are not strong form

46、 efficient.With limited exceptions,markets are semi-strong form efficient and hencePublicly available information has no predictive power in respect to market prices.Typical investors should not expect to earn abnormal returns trading on publicly available information.It is pointless to time the pur

47、chase or sale of the firms securities.42Financialinstruments金融工具共45页，您现在浏览的是第42页!Managing RiskRisk is defined as the variability of returns from the expected valuesIn financial markets volatility results in riskCompanies use derivatives to manage risk and incentivize managers.Derivatives include for

48、wards,futures,optionsSo called as their value is derived from that of the underlying assets which could be shares/currency/modities 43Financialinstruments金融工具共45页，您现在浏览的是第43页!Option contractsForward contracts are obligations to deliver/accept delivery at a pre-specified price.Options are rights,but

49、not obligations to either take delivery or to deliver,at a pre-specified(exercise or strike)price.Call options confer the right to buy the underlying shares at the strike pricePut options confer the right to sell the underlying shares at the strike priceThe option buyer pays a premium to the option

50、seller(writer)for this right44Financialinstruments金融工具共45页，您现在浏览的是第44页!Valuing OptionsIn theory,the value of an option depends upon(Black Scholes model):The current price of the underlying assetThe options time to maturityThe options strike priceThe interest rateThe expected volatility on the underl