Ch.6 Capital Markets

Question 1

What are the two basic segments of the capital markets?

Answer 1

• Debt Market, fixed income capital, such as bond securities and term loans
• Equity Market, includes securities such as shares of common and preferred stock.

Question 2

Who are the key participants in the capital markets?

Answer 2

Issuers of the securities
investor who buys securities
Broker-dealers
Regulators

Question 3

List the different issuers of securities in the capital markets.

Answer 3

Governments and Central Banks
Corporations
State owned enterprises 
Sub Sovereign entities-(states couties, cities etc)
Mutual fund securities

Question 4

What is the difference between retail and institutional investors?

Answer 4

individual vs corp

Quantity differences

Question 5

Discuss the concept of primary markets versus secondary markets.

Answer 5

Primary is the new issue of an security through IPO and the secondary market is the exchange between investors

Question 6

What is a QIB?

Answer 6

Qualified Institutional Buyers

• manages at least 100million
• Usually in the private market…better prices and less restrictive

Question 7

What are the principal benefits of organized securities exchanges?

Answer 7

_maintain supply and demand pricing of securities, fairness

• minimize volatility with frequent trading.
• Maintain large market to enable issuers to raise capital through IPO
• Regulated environment for fairness

Question 8

What are the purposes of a bond indenture?

Answer 8

Describes the bond issue
lists collateral
makes representations and warranties
specifies covenants
state the terms by which the company will provide funds for redemption
sets for the interest payments schedule

Question 9

What are sovereign bonds?

Answer 9

Bonds issued by a national government

Question 10

What are Eurobonds?

Answer 10

Bonds issued in another currency other than the country in which they are held. They have nothing to do with Europe.

Question 11

What are floating-rate securities?

Answer 11

-Adjustable rate interest based off the LIBOR.

Question 12

What are representations and warranties?

Answer 12

-Part of debt contract provisions

existing conditions at the time when the loan agreement is executed.

Question 13

What is a MAC clause?

Answer 13

-Material Adverse Change Clause
Allows the lender to declare a borrower to be in default. Used to renegotiate the loan agreement when bad news comes out instead or canceling the agreement.

Question 14

What is a loan guarantee?

Answer 14

-Lender wants a guarantee from the parent company. Allows lenders recourse to the parent company.

Question 15

Define par value?

Answer 15

-Amount of money stockholders must put up in case of a bankruptcy.

Question 16

retained earnings?

Answer 16

-earnings kept and reinvested in the company instead of dividend payments. Balance sheet item

Question 17

additional paid-in capital?

Answer 17

-APIC

difference at the time of issue between the par value and the issuance price of any new stock sold.

Question 18

What is preferred stock?

Answer 18

-considered to be debt due to the fixed dividend payments. No tax benefits like interest payments

Question 19

What are convertible securities?

Answer 19

-bonds or preferred stock that may be exchanged for common stock

Question 20

What are depository receipts?

Answer 20

• An ADR

Allows investors to invest on a local exchange in a foreign company.

Question 21

Off Balance Sheet financing

Answer 21

Leasing or rental

Factoring