Slide 21–1

Chapter Twenty One

Investment Banks, Brokerage Firms, and Mutual Funds

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Investment Banks

• Intermediaries that help corporations raise funds by selling securities in the financial markets

• Investment banks may underwrite a security issue

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Underwriting Stocks and Bonds

• Giving Advice– When to offer?

– At what price?

• Filing Documents– SEC

– Registration statement

– Prospectus

• Underwriting– Syndicate

• Marketing Outcomes– Fully subscribed

– Undersubscribed

– Oversubscribed

• Best Efforts

Figure 21-1: Front Page of a Prospectus

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Ten Largest Underwriters in the U.S.

Slide 21–7

Securities Brokers and Dealers

• Brokerage Service– Securities Orders

• Market Order

• Limit Order

– Other Services• Margin Credit

• Full-Service Brokers versus Discount Brokers• Securities dealers hold securities and make a market

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Mutual Funds

• Mutual funds pool the resources of many small investors by selling them shares and using the proceeds to buy securities

Slide 21–9

Types of Mutual Funds

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Mutual Fund Families (Complexes)

• Investment companies usually offer a number of different types of mutual funds

• Investors can often move investments among these funds without penalty

• The complexes often issue consolidated statements

Mutual fund fact bookhttp://www.ici.org/aboutfunds/factbook_toc.html

Mutual Fund Complexes, Assets, and Total Number of Funds

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Mutual Funds on the Rise

Figure 21-2 from Financial Markets and Institutions, Third Edition

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Figure 21-4: Distribution of Mutual Fund Assets, 1986 and 2001

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Figure 21-6: Average Asset Allocation for All 401(k) Plan Balances

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Figure 21-5: Household Ownership of Mutual Funds, 1980–2000

Household Ownership of Mutual Funds

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Fee Structure of Investment Funds

• Open-End Fund• Closed-End Fund

– Load Funds

– No-Load Funds

Calculating a Mutual Fund’s Net Asset Value

• Net Asset Value (NAV)

• Definition: Total value of the mutual fund’s stocks, bonds, cash, and other assets minus any liabilities such as accrued fees, divided by the number of shares outstanding

Stocks $35,000,000Bonds $15,000,000Cash $3,000,000

Total value of assets $53,000,000Liabilities -$800,000

Net worth $52,200,000Outstanding shares 15 million

NAV = $52,200,000/15,000,000 = $3.48

Hedge Funds

• Take advantage of unusual spreads between security prices

• Often highly leveraged

• Relatively unregulated

Figure 21-7: The Price of Two Similar Securities