Revise Lecture 9. Q1: What is capital market? Revise Lecture 9 Q2: What is primary and secondary...

Revise Lecture 9

Revise Lecture 9

Q1: What is capital market?

Revise Lecture 9

Q2: What is primary and secondary markets?

Revise Lecture 9

Q3: What is IPOs?

Revise Lecture 9

• Q4: What is Underwriter means?

Revise Lecture 9

Q5: What is the difference between Retail banking and Merchant banking?

Revise Lecture 9

Q6: Four names of merchant banks?

Lecture 10

• Capital Market Instruments

Capital Market Instruments

• If a company needs to raise funds for the long-term, it can access the capital markets.

• The following are the different types of capital market instruments;

Capital Market Instruments

1. Bonds 2. Junk Bonds (unsecured)3. Debentures / Loan notes (secured on an

asset or by covenants)4. Preference Shares traded on the main stock

market5. Shares in Alternative investment market -

AIM

Capital Market Instruments

Bonds:

• A bond is a debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

Capital Market Instruments

Junk Bond:• A bond with a credit rating BB or lower issued

for leveraged buyouts and other takeovers by companies with questionable credit.

• The interest rate is higher in order to compensate holders for that risk.

• A bond rated usually BB or lower because of its high default risk. Also known as a High-yield bond.

Capital Market Instruments

Debenture:• A debenture (also called a note) is an

unsecured corporate bond or a corporate bond that does not have a certain line of income or equipment to guarantee repayment of principal upon the bond’s maturity.

• A debenture is the most common forms of long-term loan taken by a company.

Capital Market Instruments

Debenture:• Debentures are medium to long-term debt

instrument used by large companies to obtain funds.

• A corporation receives an advantage when it issues debentures because it means that the company does not have to set aside certain assets or income in order to guarantee against its default in paying back the principal at maturity.

Capital Market Instruments

Debenture:• Debentures are generally freely transferable

by the debenture holder.

• Debenture holders have no voting rights and the interest given to them is charge against profit in company’s FS.

Capital Market Instruments

Debenture:• Where repayment is secured by a charge

overland the document is called a ‘Mortgage’• Where repayment is secured by a charge

other assets of the company the document is called ‘Debenture’.

• Where no security is involved, the document is called ‘Note’ or ‘Unsecured deposit note’.

Capital Market Instruments

Preference Shares:• Preferential shareholders enjoy a preferential

right over equity shareholders with regards to;1. Receipt of dividend2. Receipt of residual funds after liquidation However, Preferential shareholders do not

have voting rights, they are entitled only to a fixed dividend

Capital Market Instruments

Alternative Investment Market – AIM• AIM is a sub-market of the London Stock Exchange.• It was founded on the idea of allowing smaller

companies to float shares. Running since 1995, to replace the unlisted securities market with the object of allowing small growing companies to raise capital and have their shares traded in a market, without the expense of a full market listing.