Chapter 9

Question 1

Chapter 9 focuses on long term financing and mainly through

Answer 1

Capital Markets

Question 2

Loan contracts or promises made by a firm indicating scheduled repayment of the principle amounts with interest or coupon payments typically paid every 6 months

Answer 2

Bonds

Question 3

Bond investors

Answer 3

Bondholders

Question 4

Once bonds are issued they can be traded here

Answer 4

Securities Markets

Question 5

Bond prices move inversely to these

Answer 5

Yields

Question 6

Feature requires the firm to repurchase a portion of its bonds on a regular basis or set aside an equivalent amount

Answer 6

Sinking Fund

Question 7

While most bonds have a fixed rate of coupons some have variable rate tied to the prime rate or what?

Answer 7

LIBOR

Question 8

Also called a redeemable bond that a firm can choose to pay back the investor at a prescribed date prior to maturity date

Answer 8

Callable

Question 9

Help assess the perceived riskiness of a bond investment and possibility of default

Answer 9

Credit Rating Agencies

Question 10

The bonds are investment grade and worth the risk

Answer 10

BBB or Above

Question 11

These are junk bonds with speculative (high yield) ratings are below this point and riskier

Answer 11

BBB

Question 12

Hybrid securities with a mix of bond and stock features and typically perpetual ones pay regular dividends but have no maturity date so for immediate payout you need to sell

Answer 12

Preferred Shares

Question 13

Whereby any missed regular dividend payments must be accumulated and paid before any common dividends can be paid

Answer 13

Cumulative Features of Preferred Shares

Question 14

Net income available to common shareholders after preferred shares

Answer 14

NIAC

Question 15

For investors preferred shares tend to increase when what rates decline (unless a firm is in financial distress)

Answer 15

Interest

Question 16

The ultimate owners of the firm or the residual claimants

Answer 16

Common Shares

Question 17

Any earnings (after the payment to other stakeholders including bonds and preferred shareholders) may be paid as dividends or reinvested depending on this policy

Answer 17

Dividend Payout Policy

Question 18

Common Shareholder voting rights show up in the elected what?

Answer 18

Board of Governors

Question 19

Returns to common shareholders can be measured as geometric or arithmetic and are considered what?

Answer 19

Historical Returns

Question 20

( Final Value / Initial Value ) ^ (1/n)

• 1

Answer 20

Geometric Returns

Question 21

Sum of ( return / n )

Answer 21

Arithmetic Returns

Question 22

The two ways to segment capital markets are what and what?

Answer 22

Public and Private

Question 23

Capital Markets

PUBLIC
1 Domestic 2 Cross-Listing 3 Organized Exchange 4 Over the Counter

A initial Public Offerings B Seasoned Equity Offerings

Seasoned Equity Offerings divide into shelf offering and rights offering

PRIVATE
1 Angel Investors 2 Venture Capital Firms

Answer 23

Overview of Capital Markets

Question 24

Involves the purchase of a large block of securities by a large institutional investor this is both more common with debt issues and much quicker and less expensive than a public offering

Answer 24

Private Placement

Question 25

Securities are offered to both large institutional investors and smaller “retail” investors which is most common with equities and often takes 6+ months and is more expensive and results in wider bond holder or stockholder bases

Answer 25

Public Offfering

Question 26

Funding in early stages often come from these individuals who buy stakes in small private firms even given the risk

Answer 26

Angel Investors

Question 27

A company in the early sates may rely on these entities organized as a limited partnership with a venture capitalist as the general partner and various institutional investors

Answer 27

Venture Capital Firm

Question 28

These agencies invest in venture capital, leveraged buyouts and “distressed” firms

Answer 28

Private Equity Firms

Question 29

When a private firm makes its equity a viable to the public in order to grow and have increased public awareness and the initial owners have a liquid market to sell their stock however the shareholders can be very diverse and the firm is accountable and must manage their time

Answer 29

Initial Public Offering

Question 30

- approval by the board - selection of the lead underwriter - prospectus is filed - underwriter and management conduct a “road show” - the underwriter “builds the book” - the IPO price is determined

Answer 30

IPO Process

Question 31

Firm Commitment, Best Efforts, Auctions

Answer 31

Types of IPOs

Question 32

IPOs tend to go thru hot and cold waves and investors who receive shares as part of an IPO and tend to experience high returns on the first day of ownership. Over the first 3 to 5 years following their issuance, IPOs tend to underperform relative to the market

Answer 32

IPO Stylized Facts

Question 33

If a firm that is already public decides to issue additional common shares the process is known as

Answer 33

Seasoned Equity Offering

Question 34

Two types of of IPOs

Answer 34

Shelf Offerings and Rights Offerings

Question 35

The type of IPO that allows issuance without a new prospectus

Answer 35

Shelf Offerings

Question 36

The IPOs that are only available to existing shareholders

Answer 36

Rights Offerings

Question 37

Stock prices tend to decrease upon the announcement of an SEO since existing shareholders are concerned about “dilution” of profits

Answer 37

Stylized Fact about IPOs

Question 38

Large firms, particularly multinationals, may raise capital outside of their domestic markets by what-ing their shares on other exchanges

Answer 38

Cross-Listing

Question 39

Non-US firms may list on US exchanges through this or negotiable certificates issued by certain US commercial banks that represent an equivalent amount of the foreign securities

Answer 39

American Depositary Receipts (ADRs)