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Slide 2: Chapter Nine The Capital Markets
Slide 3: 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 • Who is the largest purchasers of securities? Copyright © 2003 Pearson Education, Inc. Slide 9–3
Slide 4: Purpose of the capital market • By contrast to money market, firms and government use capital market for long-term investment to reduce the interest rate risk – What is interest rate risk?. • Why not use money market? Copyright © 2003 Pearson Education, Inc. Slide 9–4
Slide 5: Capital Market Trading 1. Primary market for initial sale (IPO) 2. Secondary market – Over-the-counter (NASDAQ) – Organized exchanges (i.e., NYSE) Copyright © 2003 Pearson Education, Inc. Slide 9–5
Slide 6: 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 Copyright © 2003 Pearson Education, Inc. Slide 9–6
Slide 7: Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq Copyright © 2003 Pearson Education, Inc. Slide 9–7
Slide 8: Capital Market Securities: Bonds • represent a debt owed by issuer ( what about stocks?) • Several important characteristics about bonds – – – – Maturity Interest (coupon) payment Par value (face value) Issuers. • Long-term bonds: T-notes, T-bonds, muniicipal bonds and corporate bonds Copyright © 2003 Pearson Education, Inc. Slide 9–8
Slide 9: Treasury Bonds Copyright © 2003 Pearson Education, Inc. Slide 9–9
Slide 10: Treasury Bond Interest Rates • No default risk • Very low interest rates Copyright © 2003 Pearson Education, Inc. Slide 9–10
Slide 11: Treasury Bond Interest Rates Figure 9-3: Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002 Copyright © 2003 Pearson Education, Inc. Slide 9–11
Slide 12: 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) Copyright © 2003 Pearson Education, Inc. Slide 9–12
Slide 13: What can we learn from those graphs? 1. Short term bond rates are usually lower than long term bonds rates 2. Short term rates are more volatile than long term rates because of expectation of inflation. Copyright © 2003 Pearson Education, Inc. Slide 9–13
Slide 14: Municipal Bonds 1. Issued by local, county, and state governments 2. Used to finance public interest projects 3. Tax-free municipal interest rate = taxable interest rate × (1 − marginal tax rate) 4. Two types – General obligation bonds – Revenue bonds 5. NOT default-free Copyright © 2003 Pearson Education, Inc. Slide 9–14
Slide 15: Comparing Revenue and General Obligation Bonds Figure 9-5: Issuance of Revenue and General Obligation Bonds, 1984–2000 (End of year) Copyright © 2003 Pearson Education, Inc. Slide 9–15
Slide 16: Corporate Bonds • Face value of $1,000 • 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 Copyright © 2003 Pearson Education, Inc. Slide 9–16
Slide 17: Sample Corporate Bond Figure 9-2: Sohio/BP Corporate Bond Copyright © 2003 Pearson Education, Inc. Slide 9–17
Slide 18: Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year) Copyright © 2003 Pearson Education, Inc. Slide 9–18
Slide 19: Characteristics of Corporate Bonds • Registered Bonds replace bearer bonds ( this is where “coupon payment” comes from) • Restrictive Covenants reflect the agency problem • Call Provisions – Higher yield – Sinking fund – Alternative opportunities • Conversion Copyright © 2003 Pearson Education, Inc. Slide 9–19
Slide 20: Types of Corporate Bonds • Secured Bonds – Mortgage bonds secured by physical assets (for example, real estate) – Equipment trust certificates secured by tangible non-real estate assets ( for example bonds, stocks etc.) • Unsecured Bonds – Debentures with indentures – Subordinated debentures have lower priority claim than debentures – Variable-rate bonds • Junk Bonds Copyright © 2003 Pearson Education, Inc. Slide 9–20
Slide 21: Debt Ratings Copyright © 2003 Pearson Education, Inc. Slide 9–21
Slide 22: Trends in the Bond Market Figure 9-8: Bonds and Stocks Issued, 1983–2000 Copyright © 2003 Pearson Education, Inc. Slide 9–22