Copyright © 2004 Pearson Education Canada Inc. Slide 9–2
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
Copyright © 2004 Pearson Education Canada Inc. Slide 9–3
Capital Market Trading
1. Primary market for initial sale (IPO)
2. Secondary market– Over-the-counter
– Organized exchanges (i.e., TSX)
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Want to be listed on the TSX?
• You will need:
1. At least 300 investors
2. A minimum of 1 million shares traded publicly, with a market value of $4 million
3. Any shareholder with more than 10% of the stock must provide information on their experience in business
4. A Participating Organization of the TSX must sponsor the company
Copyright © 2004 Pearson Education Canada Inc. 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
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Canada Bond Interest Rates
• No default risk
• Very low interest rates
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Figure 2: Interest Rate on Long-Term Canada Bonds and the Inflation Rate, 1976–2001
Canada Bond Interest Rates
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Compare Long-Term Canada Bonds to 90-Day Treasury Bills
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Municipal Bonds
1. Issued by local governments
2. Used to finance public interest projects
3. In the United States tax-free municipal interest rate = taxable interest rate (1 marginal tax rate)
4. Two types– General obligation bonds
– Revenue bonds
5. NOT default-free
Copyright © 2004 Pearson Education Canada Inc. Slide 9–11
Corporate Bonds
• Face value of $1000
• 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
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Characteristics of Corporate Bonds
• Registered Bonds
• Restrictive Covenants
• Call Provisions – Higher yield
– Sinking fund
– Interest of the stockholders
– Alternative opportunities
• Conversion
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Types of Corporate Bonds
• Secured Bonds– Mortgage bonds
– Equipment trust certificates
• Unsecured Bonds– Debentures
– Subordinated debentures
– Variable-rate bonds
• Junk Bonds
Copyright © 2004 Pearson Education Canada Inc. Slide 9–16
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
Copyright © 2004 Pearson Education Canada Inc. Slide 9–18
30 Stocks in the Dow Jones Industrial Average