Professional Documents
Culture Documents
Agency Issues.
Discuss which of the following forms of compensation is most likely to align the interests of managers and shareholders: a. A fixed salary b. A salary linked to company profits c. A salary that is paid partly in the form of the companys shares d. An option to buy the companys shares at an attractive price
Financing Decision
External Resources
Financial Institutions
Financial institutions are intermediaries that channel the savings of individuals, businesses, and governments into loans or investments.
In general, individuals are net suppliers of funds, while businesses and governments are net demanders of funds.
Financial Markets
Financial markets provide a forum in which suppliers of funds and demanders of funds can transact business directly.
Financial Markets
MONEY MARKET: The securities market dealing in shortterm debt and monetary instruments. Money market instruments are forms of debt that mature in less than one year and are very liquid.
Financial Markets
CAPITAL MARKET:
-where different types of securities (e.g. stocks, bonds etc.) are traded through members of securities exchanges. Eg. of securities exchanges: NYSE - New York Stock Exchange BSE Bucharest Stock Exchange Members of securities exchanges consist of mainly brokerage firms.
FINANCIAL INSTRUMENTS
Represent
Financial Markets
MONEY MARKET
CAPITAL MARKET
Treasury Bills
short term debt instruments maturity of 3, 6 or 12 month; have no interest payments (initially sold at a discount); the most liquid financial instruments; the safest financial instrument (no default risk) can be issued in different currencies (usually are issued in local currency) risk free rate instruments;
Commercial Papers
short term instruments issued by banks or well known companies; no interest payments (usually issued at a discount); interest rates are related to the issuers risk;
Bankers Acceptances
were
represent banks drafts (a promise of payment similar to a check) issued by a company for a future date and guarantee for a fee by the bank the bank acceptance = the guarantee these instruments are often resold on secondary market at a discount
Secondary Markets
Involves the trading of issues that are already outstanding Provide a means obtaining cash for sellers Provide buyers with more investment choices
Dealer market
Dealers buy shares (at the bid price) and sell shares (at the ask price) from their own inventory Dealers compete against each other
Select your broker or other advisor with the same care you exercise in finding a physician or an attorney.
Margin account
Initial margin requirement Maintenance margin requirement
when this figure is touched, the investor get a margin call, which means that he must either deposit additional funds to increase his equity or sell some of his shares.
Margin accounts are risky (the loan increases the risk and the costs for the investorbut allows to magnify the amount of money invested. A greater investment means greater profitsor losses.)
Initiating a Position
After an account is opened, the investor can begin trading! When he buy securities, he take a long position When he sell securities that he do not already own, he take a short position When he sell securities he originally bought or buy securities he originally sold, he is reversing a position
Initiating a Position
When youll initiate a long position?
When you forecast an increase in securities price!
Initiating a Position
Suppose you think IBM is overvalued at 150$ a share and its likely to decrease in future! What youll do? Short sell of IBM stocks hoping to reverse your position in the future after the price has fallen!
Limit orders
Order specifies the buy or sell price Time specifications for order may vary
Instantaneous - fill or kill, part of a day, a full day, several days, a week, a month, or good until canceled (GTC)
Maintenance margin
Required proportion of equity to stock value Protects broker if stock price declines Minimum requirement is at least 25% Margin call on undermargined account to meet margin requirement If call not met, stock will be sold to pay off the loan
QUIZ
Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary markets! Comment this statement!
QUIZ
If you suspect that a company will go bankrupt next year, which you rather hold, bonds or equity issued by the company? Why?
QUIZ
An investor deposit 2000 $ and borrows 2000$ to purchase 4000$ of securities. He owns 100 shares of KLM at 40 $ a share. KLMs price falls. Which is the price from where the broker requires additional margin to restore the initial margin requirement? What price increase of KLM stocks the investor need in order to get an annual return of 20% (the interest rate of the broker loan is 10%)?