ch.12 Global Capital Markets

The global equity market allows firms to:

- Attract capital from international investors many investors invest in foreign equities to diversify their portfolios - List their stock on multiple exchanges - Raise funds by issuing debt or equity around the world by issuing stock in other countries, firms open the door to raising capital in the foreign market, and give the firm the option of compensating local managers and employees with stock

Factors global capital markets growing so significantly?

1. advances in info technology 2. deregulation by governments

The eurobond market is attractive because:

1.It lacks regulatory interference - since companies do not have to adhere to strict regulations, the cost of issuing bonds is lower 2.It has less stringent disclosure requirements than domestic bond markets - it can be cheaper and less time consuming to offer eurobonds than dollar-denominated bonds 3.It is more favorable from a tax perspective - Because of special tax exemptions, eurobonds can be sold directly to foreign investors.

Foreign bonds are sold outside the borrower's country and are denominated in the currency of the country in which they are issued

A U.S. company can issue bonds in Japanese yen, and sells them in Japan. This would be foreign bonds.

Eurobonds are underwritten by a syndicate of banks and placed in countries other than the one in whose currency the bond is denominated

A U.S. company can offer bonds denominated in Japanese yen, that are sold in Germany. This would be eurobonds.

How Do Exchange Rates Affect The Cost Of Capital?

Adverse exchange rates can increase the cost of foreign currency loans Firms must weigh the benefits of a lower interest rate against the risk of an increase in the real cost of capital due to adverse exchange rate movements

What is the global bond market?

Bonds are an important means of financing for many companies The most common kind is a fixed rate bond which gives investors fixed cash payoffs The global bond market grew rapidly during the 1980s and 1990s and continues to do in the new century

Stock of cross border bank loans was $3,600 billion in 1990. $7859 in 2000. $33,913 billion in 2012.

Cross border: 21,979 billion in 2012. International Bond market: 33913 billion in 2012

how have global capital markets changed since 1990?

GCMs (borrowing/investing in other countries) have grown rapidly. Cross Border (globally)

Which event was initially responsible for London becoming the leading center of eurocurrency trading? A. Regulations that discouraged British banks from trading in the eurocurrency market. B. Strengthening of the British pound against major European currencies in the 1960s. C. Collapse of the Bretton Woods system. D. Prohibition of British banks from lending British pounds to finance non-British trade.

Prohibition of British banks from lending British pounds to finance non-British trade.

A capital market brings together those who want to invest money and those who want to borrow money.

TRUE

Adverse exchange rate movements can transform otherwise profitable investments into unprofitable investments.

TRUE

Barriers to cross-border capital flows limit the ability of capital to roam the world freely in search of the highest risk-adjusted return; consequently, at any one time, there may be too much capital invested in some markets and too little in others.

TRUE

Deregulation in a number of key countries has facilitated the growth of the international capital market.

TRUE

Domestic currency deposits are regulated in all industrialized countries.

TRUE

The global financial crisis of 2008 and 2009 focused attention on the need for new regulations to govern certain sectors of the financial services industry.

TRUE

The main factor that makes the eurocurrency market attractive to both depositors and borrowers is its lack of government regulation.

TRUE

What are the adv/attractiveness of the Eurocurrency market?

The eurocurrency market is attractive because - not regulated by the government banks - can offer higher interest rates on eurocurrency deposits than on deposits made in the home currency - banks can charge lower interest rates to eurocurrency borrowers than to those who borrow the home currency

Deregulation by governments

They used to restrict now they do not. growth in international capital markets governments have traditionally limited foreign investment in domestic companies.

Diversified Portfolio

an investor who has holdings in several different industries; Don't put all your eggs in one basket. instead of having a few stocks investors can have many due to globalization

The term eurocurrency refers to a) the currency used by the European Union countries b) any currency banked outside its country of origin c) currencies purchased in the international equities market d) bonds sold outside the borrower's country that are denominated in the currency of the country in which they are issued

any currency banked outside its country of origin

How did the Eurocurrency market emerge?

began in the 1950s when the Eastern bloc countries feared that the United States might seize their dollars. n 1957, the market surged again after changes in British laws prohibited banks from lending pounds to finance non-British trade. The banks started to finance the trade using dollars instead. London continues to be the leading center of the eurocurrency market

market makers

bring investors and borrowers together. financial service companies that connect investors/borrowers either directly or indirectly.

Capital Markets

brings together investors and borrowers.

a capital market

brings together those who want to invest money/borrow money

market makers

commercial bankers, investment bankers

market makers

commercial banks

investors

companies, individuals, institutions

Bigger pool of potential investors in the global market than in the _________

domestic market. borrowers will pay less to borrow in the global market.

What is eurocurrency?

eurocurrency is any currency banked outside its country of origin

Historically, the most tightly regulated industry has been a) agriculture b) consumer electronics c) automotives d) financial services

financial services

bond loan

fixed stream you get money

investors

include corporations with surplus cash, individuals, nonbank financial institutions

borrowers

include individuals, companies, and governments

what makes the global capital market so attractive from an investors view?

investors benefit because of the wide range of investment opportunities available in the global capital markets allows them to diversify their portfolios. In doing so >> reducing their risk.

main players in generic capital market

investors, market makers, and borrowers

investors with diversified portfolio

is less risky. Mix your investments, so your not at risk

what makes a global capital market attractive from a borrowers view?

its bigger supply of funds. the cost of borrowing the money will be lower than what the firm could get in its more limited domestic market. much bigger pool of potential investors in the global capital market than in the domestic market, so borrowers will pay less to borrow in the global market

Speculative capital flows

may be the result of inaccurate information about investment opportunities if global capital markets continue to grow, better quality information is likely to be available from financial intermediaries

diversity

more you diversify>>less likely all your stocks will be broken. If one Market (US) got hit, your money in Japan market will be ok. Don't invest in only one company.

systematic risk

movements in a stocks portfolios value that are attributable in macroeconomic forces affecting all firms in an economy>>rather than factors specific to an individual firm.

companies can raise money

selling stock, equity to investors, cash loan or a bond issue

less developed nations

smaller capital markets

What makes the eurocurrency market unattractive?

the eurocurrency market is unregulated, there is a higher risk of bank failure.

Advances in information technology

the growth of international communications technology and advances in data processing capabilities. cost to trade went down internet/24 hour trading shocks all over the globe>>technology nobody really needs advisement anymore because of technology.

stock

you own claim over company