FINA 3303

first commitment versus best effort

Best Efforts underwriting - an underwriter agrees to give his or her highest personal effort to sell as much as possible of the IPO shares. Firm commitment underwriting - the underwriter guarantees sale of the block of shares or it will purchase any unsold shares

The Primary Market: Private Placements Disadvantages

DISADVANTAGES - lower liquidity (no secondary market - limitied in proceeds - limited to qualified buyers - higher yields required

non-competitive bids specify:

ONLY QUANTITY to be purchased at yield. all non-competitive bids are accepted

What is buying on margin? and what is true about doing so?

Paying a small amount of the stock price and borrowing the rest from a bank or broker 1. The broker sets a maintenance margin in order to reduce the risk of losses from the margin loan. 2. The initial margin requirements are determined by the Board of Governors of the Federal Reserve System. 3. The margin call requires the investor to add more cash (or securities) to her margin account.

Which of the following are asset classes of financial securities? Treasuries Stocks (equities) Derivatives Bonds (fixed-income securities)

Stocks (equities) Derivatives Bonds (fixed-income securities)

Major Asset Classes (4)

cash (cash equivalents) equity/stocks debt/fixed income derivatives

financial investments

contracts that provide a claim to future cash flows and possibly ownership rights to the firm

A limit order has _____. execution uncertainty, but not price uncertainty price uncertainty, but not execution uncertainty neither price uncertainty nor execution uncertainty price uncertainty and execution uncertainty

execution uncertainty, but not price uncertainty

_____ assets are claims on real assets or on the cash flows they produce.

financial

A procedure in which the underwriter (investment bank) enters into a written agreement with the issuer of the securities to purchase the securities and then to resell them to the public is called

firm commitment underwriting

Market orders get executed _____ at _____. immediately; the limit price whenever the stock price goes below the limit; the limit price whenever the stock price goes above the limit; the current price in the market immediately; the current price in the market

immediately; the current price in the market

Selling stocks to the investing public for the first time is called a/an _____, while selling additional shares at a later date is called a/an _____.

initial public offering; seasoned equity offering

real investments

physical, tangible assets and capital that are acquired and developed to generate cash flows ex: decision to build a new factory that increases output

_____ assets are used to produce products or services

real

common asset classes alternatives

real estate commodities currencies venture capital & private equity wint, art, memorabilia

competitive bids specify:

you bid on the YIELD/RATE and bond QUANTITY willing to be purchased at that yield

step in equity IPO

(1.) Choose a lead underwriter and a type of offering (2.) The Underwriter files a registration statement and preliminary prospectus (3.) Underwriter conducts a road show (used to gauge interest among potential investors) (4.) After the meetings, the underwriter determines the offer price and number of shares. (5.) A final prospectus, including the offer details, is filed with the SEC. (6.) Securities are then sold to investors and start trading on an exchange.

Which of the following statements are true about the auctions used to issue U.S. Treasury securities? Competitive bids specify both the quantity of bonds desired and the required yield, non-competitive bids specify only a quantity of bonds desired. All participants that submit bids are guaranteed to receive bonds, but the yield on the bonds is uncertain. The yield on the bonds is determined by the lowest competitive bid (in terms of yield) at which it is possible to clear the auction. A primary dealer is able to submit both competitive bids and non-competitive bids. The yield on the bonds is determined by the highest bid.

- Competitive bids specify both the quantity of bonds desired and the required yield, non-competitive bids specify only a quantity of bonds desired. - The yield on the bonds is determined by the lowest competitive bid (in terms of yield) at which it is possible to clear the auction. - A primary dealer is able to submit both competitive bids and non-competitive bids.

types of bonds (5)

-Treasury bills (mature < 1 yr) -Treasury Notes (mature in 1-10 years) - Treasury Bonds (Mature in > 10 years) - TIPS (fixed REAL rate of interest, meaning inflation-protected bonds) - FRN (FRNs are a short-term solution to interest rate spikes)

Which of the following statements are true about private placements? Check all that apply: Private placements are a type of primary market transaction. In private placements, the company sells its share directly to a small group of institutional investors. Private placements usually have a lower liquidity compared to publicly traded securities, since they do not trade in public markets. Private placements are usually more expensive initially than public offerings.

1. Private placements are a type of primary market transaction. 2. In private placements, the company sells its share directly to a small group of institutional investors. 3. Private placements usually have a lower liquidity compared to publicly traded securities, since they do not trade in public markets.

Which of the following statements are true about short selling? Short sellers borrow securities and sell them immediately. The investor involved in short selling anticipates that the share price will increase. Short selling means that an investor purchases securities using funds borrowed from her broker. The investor involved in short selling anticipates that the share price will fall. Short selling is the sale of a security that is not owned by the seller.

1. Short sellers borrow securities and sell them immediately. 2. The investor involved in short selling anticipates that the share price will fall. 3. Short selling is the sale of a security that is not owned by the seller.

primary market: private placements advantages

ADVANTAGES - fewer disclosure requirements - faster process - lower flotation costs (pay IB bank less) - securities can be customized