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lend money Important international financial centers are London, Tokyo and New York Important financial entrepots or channels are Switzerland, Luxembourg, Singapore, Hong Kong, the Bahamas and Bahrain
convertible currency deposited in a bank outside its country of origin E.g. US dollars on deposit in London become Eurodollars
participants buy and sell debt securities , usually in the form of bonds is an estimated $82.2 trillion.
Participants include:
The international bond market encompasses two market segments: 1. Foreign Bonds
2.
Eurobonds
borrower to the investors in a national capital market and denominated in the nations currency
Example: A German MNC issuing dollar-
particular currency but sold to investors in national capital markets other than the country that issued the denominating currency
Example: A Dutch borrower issuing dollar-
operate in parallel with the domestic national bonds market and all the three compete with one another
Eurobonds are known by the currency in which
they are denominated e.g. Eurodollar bonds, Euroyen bonds, EuroSF bonds etc.
Global Bonds:
A global bond issue is a very large international
bond offerings by a single borrower that is simultaneously sold in North America, Europe and Asia
The issues were first offered in 1989
Fixed rate notes with maturities from less than a year to about ten years Euro MTN issue is partially sold on a continuous basis
Medium-term bonds with coupon payments indexed to some reference rate (e.g. 3 month ) Coupon payments are usually quarterly or semiannual
Equity-Related Bonds:
1.
Convertible Bond: - allows the investor to exchange the bond for a predetermined number of equity shares of the issuer
Equity-Related Bonds:
2.
Bonds with equity warrants: - a straight fixed-rate bond with the addition of a call option (warrant) feature. The warrant entitles purchase of certain number of equity shares at a prestated price
Zero-Coupon Bonds:
Zero- coupon bonds are sold at a discount from face value and do not pay any coupon over their life
Dual-Currency Bonds:
A dual-currency bond is a straight fixed-rate bond issued in one currency, say, euro, that pays coupon in the same currency At maturity, the principal is repaid in another currency, say, US dollars
Instrument
Payoff at Maturity
Straight fixed-rate
Currency of issue
Floating-rate note
Convertible bond Straight fixed-rate with equity warrants
Quarterly Or semi-annual
Annual Annual
Variable
Fixed Fixed
Currency of issue
Currency of issue or conversion to equity shares Currency of issue plus equity shares from exercised warrants
Zero-coupon bond
None
Zero
Fixed
Currency of issue
Dual currency
Primary Market:
A borrower desiring to raise funds by issuing Eurobonds to investors contacts an investment banker
Secondary Market:
market may be resold prior to their maturity in the secondary market It is an over-the-counter market with principal trading in London and some other centers such as Zurich, Luxembourg, Frankfurt and Amsterdam
To Borrowers: Size and depth of the market are large Freedom and flexibility not found in domestic
markets Relatively low costs ( around 2.5%) Interest costs are competitive ( especially dollar Eurobonds) Long maturity periods suitable for long-term funding ( 30 years) Sound institutional framework for underwriting, distribution and placement of securities
To Investors:
Interest can be paid free of income tax
New York Stock Exchange (NYSE) buyers and sellers meet at the trading post to negotiate specialist acts as a dealer (market maker), as necessary American Stock Exchange (AMEX) trading system same as NYSE
transactions in a given stock each dealer/market maker posts a bid and offer price on the systems network
Cincinnati
Hong Kong
Canada Toronto
Execute orders
information
Act as auctioneer
Market order
an order for the broker and market specialist to transact at the
Margin Requirements
Initial margin Maintenance margin Margin call
The Dow Jones Industrial Average (the DJIA) a price-weighted inex of the values of 30 large (in terms of sales and total assets) corporations The NYSE composite index a value-weighted index of all common stocks listed on NYSE the Standard & Poors 500 index a value-weighted index of the stocks of 500 of the largest U.S. corporations listed on the NYSE and NASDAQ The NASDAQ composite index a value-weighted index of three categories of NASDAQ companies: industrials, banks, and insurance companies
S&P 500
NYSE AMEX
NASDAQ
Wilshire 5000 (also 4500) Russell 2000 (also 3000 and 1000)
Value Line
World
Morgan Stanley (EAFE)
Country
Japan Nikkei 225, Nikkei 300, Topix UK FTSE 100, FTSE 250 Germany DAX France CAC Hong Kong Hang Seng
Small firm
Weather
Does Not Say: Prices are uncaused Investors are foolish and too stupid to be in the market All shares of stock have the same expected returns Investors should throw darts to select stocks There is no upward trend in stock prices Does Say Prices reflect underlying value Financial managers cannot time stock and bond sales Sales of stock and bonds will not depress prices
patterns in charts of stock and market returns The truth is less interesting There is some evidence against efficiency
Seasonality
Small vs large stocks Value vs growth stocks
imposed by the Securities and Exchange Commission (SEC) Main emphasis of SEC regulation is on full and fair disclosure of information on securities Securities Act of 1933/Securities Exchange Act of 1934 Delegates certain regulatory responsibilities to the markets for the day-to-day surveillance of activity Recently imposed regulations on financial markets intended to reduce excessive price fluctuations
introduction of a common currency, the Euro International stock markets allow investors to diversify by holding stocks issued by corporations in foreign countries Increased risk due to less complete information about foreign stocks, foreign exchange risk, and political risk
the funds needed Reduced costs (assumes markets not completely integrated) Diversify funding sources Foreign currency exposure management