Chapter 12: Global Capital Market

Attractions of the global capital market for borrowers?

- Borrowers benefit from the additional supply (liquidity) of funds global capital markets provide. 1. Lowers cost of capital (the additional cost of borrowing $) 2. Interest rate for debt loans; dividends on equity loans

Could deregulation of capital markets and fewer controls on cross border capital flows make nations more vulnerable to the effects of speculative capital flows?

- Can have a destabilizing effect on economies ("hot" money > "patient" money)

What is the bond market?

- Financing for many companies, fixed rate, cash payout - Two types of international bonds = foreign bonds and euro bonds

Attractions of the global capital market for lenders/investors?

- Investors benefit from the wider range of investment opportunities 1. Diversify portfolios will lower your risk

What is a Foreign bond?

- Sold outside the borrower's country and are denominated in the currency of the country in which they are issued. - Used by companies when they think it will reduce the cost of capital (interest rate) - Have different names

What are Eurobonds?

- Underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated (bond issued by a german firm denominated in $ and sold to investors outside U.S. by syndicate of banks)

Risks of global capital markets

1. "Hot" vs "Patient" money 2. Information 3. Speculative capital flows

2 Reasons / Factors for growth of the global capital market?

1. Advances in information technology: - Advances in data processing capabilities - 24-hour-day trading - Shocks in financial market spread around the world very quickly - People argue that MB>MC 2. Deregulation by governments: - Governments have traditionally limited foreign investment in domestic companies, and the amount of foreign investment their citizens could make as well - Many countries have lowered capital controls making it easier for both inward and outward investment to occur

Who are Investors?

1. Corporations with surplus cash 2. Individuals 3. Non-bank financial institutions

What are the 3 capital markets?

1. Eurocurrency 2. Bond Market 3. Global equity market

What is Eurocurrency & Why had it grown?

1. Eurocurrency is any currency banked outside its country of origin, attractive, not regulated by government. 2. Banks can offer higher interest rates on eurocurrency deposits than on deposits made in the home currency 3. Banks can charge lower interest rates to eurocurrency borrowers than to those who borrow the home currency

Who are Borrowers?

1. Individuals 2. Companies 3. Governments

What are the 3 players in a global capital market?

1. Investors 2. Borrowers 3. Market makers

Why is the bond market attractive?

1. Lacks regulatory interference - Since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower 2. Less stringent disclosure requirements - It can be cheaper and less time consuming to offer eurobonds than dollar-denominated bonds 3. More tax-friendly cost of issuing bonds - Eurobonds can be sold directly to foreign investors

Who are Market makers?

1. They connect / bring investors and borrowers together - Either directly (investment banks) - Or indirectly (commercial banks)

Problems with Eurocurrency?

1. Unregulated 2. Risk of bank failures losing depositors funds 3. Companies who borrowed can be exposed to foreign exchange risk (can reduce risk through forward market hedges)

What is the global capital market?

A market that brings together investors and borrowers

What is the global equity market?

Allows firms to: 1. Attract capital from international investors - Many investors buy foreign equities to diversify their portfolios 2. List their stock in the equity markets of other nations - This type of trend may result in an internationalization of corporate ownership

How does exchange rates effect capital markets?

Fluctuating exchange rates can make profitable investments turn into unprofitable investments.

Risk of global capital market: "Hot" vs. "Patient" Money

Hot money: maximize interest/capital gain Patient money: long-term capital; no quick profit Hot money > Patient money

Risk of global capital market: Speculative capital flows

If global capital markets continue to grow, better quality information is likely to be available from financial intermediaries

What are Capital Market Loans?

They can be equity loans (corp. sells stocks to investor) or debt loans (corp. repays a predetermined portion of loan in equal payments that are regular intervals)

Risk of global capital market: Information

speculative capital flows may be the result of inaccurate information about investment opportunities