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 9–9
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 9–16
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 9–20
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 9–24
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