Chapter Nine

The Capital Markets

Slide 9–3

Capital Markets

• Original maturity is greater than one year

• Best known capital market securities:– Stocks and bonds

• Primary issuers of securities:– Federal and local governments

– Corporations

• Largest purchasers of securities:– You and me

Slide 9–4

Capital Market Trading

1. Primary market for initial sale (IPO)

2. Secondary market– Over-the-counter

– Organized exchanges (i.e., NYSE)

Slide 9–5

Want to be listed on the NYSE?

• You will need at least:

1. 2000 stockholders, each owning at least 100 shares

2. A minimum of 1.1 million shares traded publicly

3. Pretax earnings of $2.5 million at the time of listing

4. $2 million in pretax earning in each of the two prior years

5. A total of $100 million in market value of publicly traded shares

Slide 9–6

Figure 9-1: Number of Listed Companies Yearly Comparison with NYSE, AMEX, and Nasdaq

Slide 9–7

Treasury Bonds

Slide 9–8

Treasury Bond Interest Rates

• No default risk

• Very low interest rates

Slide 9–9

Figure 9-3: Interest Rate on Treasury Bonds and the Inflation Rate, 1973–2002

Treasury Bond Interest Rates

Slide 9–10

Compare 20-Year Treasury Bonds to 90-Day Treasury Bills

Figure 9-4: Interest Rates on Treasury Bills and Treasury Bonds, 1973–2002 (January of each year)

Slide 9–11

Municipal Bonds

1. Issued by local, county, and state governments

2. Used to finance public interest projects

3. Tax-free municipal interest rate = taxable interest rate (1 marginal tax rate)

4. Two types– General obligation bonds

– Revenue bonds

5. NOT default-free

Slide 9–12

Comparing Revenue and General Obligation Bonds

Figure 9-5: Issuance of Revenue and General Obligation Bonds, 1984–2000 (End of year)

Slide 9–13

Corporate Bonds

• Face value of $1,000

• Pay interest semi-annually

• Can be redeemed anytime the issuer wishes

• Degree of risk varies with each bond

• Interest rate varies with level of risk

Slide 9–14

Sample Corporate Bond

Figure 9-2: Sohio/BP Corporate Bond

Slide 9–15

Figure 9-7: Corporate Bond Interest Rates, 1973–2002 (End of year)

Slide 9–16

Characteristics of Corporate Bonds

• Registered Bonds

• Restrictive Covenants

• Call Provisions – Higher yield

– Sinking fund

– Interest of the stockholders

– Alternative opportunities

• Conversion

Slide 9–17

Types of Corporate Bonds

• Secured Bonds– Mortgage bonds

– Equipment trust certificates

• Unsecured Bonds– Debentures

– Subordinated debentures

– Variable-rate bonds

• Junk Bonds

Slide 9–18

Debt Ratings

Slide 9–19

Trends in the Bond Market

Figure 9-8: Bonds and Stocks Issued, 1983–2000

Slide 9–20

Stock

1. Represents ownership in a firm

2. Earn a return in two ways– Price of the stock rises

over time

– Dividends are paid to the stockholder

3. Stockholders have claim on all assets

4. Right to vote for directors and on certain issues

5. Two types– Common stock

• Right to vote• Receive dividends

– Preferred stock• Receive a fixed dividend• Do not usually vote

Slide 9–21

Figure 9-9: Wien Consolidated Airlines Stock

Sample Corporate Stock Certificate

Slide 9–22

Stock Prices

Slide 9–23

30 Stocks in the Dow Jones Industrial Average

Slide 9–24

Stock Market Indexes

Graph of Dow Jones Industrial Averagehttp://finance.yahoo.com/q?s=^DJI&d=c&k=c1&a=v&p=s&t=my&1=on&z=m&q=l

Slide 9–25

Public Issues of Stocks and Bonds

• Two principal ways to sell securities to the public

– Investment bankers – Private placement