Chapter 12. The Global Capital Market

Two factors are responsible for the growth of capital markets:

1) Advances in information technology 2) Deregulation by governments

The global equity market allows firms to

1) Attract capital from international investors 2) List their stock on multiple exchanges 3) Raise funds by issuing debt or equity around the world

The Eurocurrency market has two significant drawbacks:

1) Because the Eurocurrency market is unregulated, there is a higher risk that bank failure could cause depositors to lose funds 2) Companies borrowing Eurocurrencies can be exposed to foreign exchange risk

There are two types of international bonds:

1) Foreign bonds 2) Eurobonds

The Eurobond market is attractive because

1) It lacks regulatory interference 2) It has less stringent disclosure requirements than domestic bond markets 3) It is more favorable from a tax perspective

About two-thirds of all Eurocurrencies are

Eurodollars

A Eurocurrency is

any currency banked outside its country of origin

Foreign bonds

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

Eurobonds

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

Capital markets are likely to

continue to integrate providing more opportunities for business

investors -

corporations with surplus cash, individuals, and non-bank financial institutions

Growth in global capital markets has

created opportunities for firms to borrow or invest internationally

Investors benefit from the wider range of investment opportunities:

diversify portfolios and lower risk

Bonds are an important means of

financing for many companies

Global capital markets have

grown rapidly

Deregulation by governments

has facilitated growth in international capital markets

Today's capital markets are

highly interconnected and facilitate the free flow of money around the world

Adverse exchange rates can

increase the cost of foreign currency loans

borrowers -

individuals, companies, and governments

The Eurocurrency market is attractive because

it is 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

Growth in capital markets offers

opportunities for firms, institutions, and individuals to diversify their investments and reduce risk

The Eurocurrency market is an important

source of low-cost funds for international companies

The eurocurrency market began in the 1950s when

the Eastern bloc countries feared that the United States might seize their dollars

Firms must weigh

the benefits of a lower interest rate against the risk of an increase in the real cost of capital

markets makers -

the financial service companies that connect investors and borrowers, either directly (investment banks) or indirectly (commercial banks)

Advances in information technology

the growth of international communications technology and advances in data processing capabilities

London became

the leading center of the eurocurrency market --> continues to hold this position today

cost of capital

the price of borrowing money or the rate of return that borrowers pay investors