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The Creation of Financial Assets

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Presentation on theme: "The Creation of Financial Assets"— Presentation transcript:

1 The Creation of Financial Assets
Chapter 2 The Creation of Financial Assets

2 Forms of Business Sole proprietorships Partnerships
Limited partnerships General partners Limited partners

3 Corporations Charter from a state Bylaws
Relationship between firm and stockholders (owners)

4 S corporations and limited liability companies (LLC)
Advantages of Limited liability Permanence Transfer of title S corporations and limited liability companies (LLC)

5 Importance of liquidity
The Role of Money Medium of exchange Importance of liquidity

6 M-1 sum of cash, coin, and checking accounts
Money Supply M-1 sum of cash, coin, and checking accounts M-2 sum of cash, coin, checking accounts, plus savings accounts

7 Money Supply M-2 is a broader definition M-2 is not affected by shifting funds between checking and savings accounts

8 The Role of Interest Rates
Allocate scarce credit Short-term / Money market Long-term / Capital market

9 Structure of Yield Yield curve Generally long-term implies higher rates (positively sloped yield curve)

10 Time and Yields Positively sloped yield curve

11 Time and Yields Negatively sloped yield curve

12 The Transfer of Funds from Savers to Business
Income that is saved is subsequently invested The process of investing creates financial claims Financial claims are either debt equity

13 The saver has a claim (debt or equity) on the issuer
The Direct Transfer Security General Public (Savers) Corporation Money The saver has a claim (debt or equity) on the issuer The issuer receives the money

14 The Indirect Transfer through a Financial Intermediary
Account General Public (Savers) Financial Intermediary Money The saver has a claim on the financial intermediary The financial intermediary has a claim on the ultimate user of the funds

15 Issuing and Selling New Securities
Difference between Primary markets - the first sale Secondary markets - subsequent sales

16 The Sale of New Securities to the General Public
Initial public offerings (IPOs) The role of investment bankers

17 Underwriting Firm commitment The guaranteed sale Underwriter bears the risk

18 The Sale of New Securities To the General Public
Best effort agreements issuing firm bears the risk

19 The Sale of New Securities to the General Public
The mechanics of security underwriting the originating house or managing undewriter the syndicate the underwriting disconnect

20 Regulation of Initial Public Offerings
Registration of new securities The prospectus Securities and Exchange Commission (SEC) The shelf-registration

21 Pricing an IPO Underpricing leads to windfall gains to initial buyers
Overpricing inflicts losses on initial buyers and the investment bankers Tendency to underprice to assure a successful sale

22 The Price Volatility of IPOs
Prices can rise dramatically Many firms eventually fail Few investors get to participate in an IPO

23 Financial Intermediaries and Investment Bankers Differ
Financial Intermediaries create claims on themselves (e.g. a savings account) Investment bankers facilitate the sale of new securities do not create claims on themselves

24 Information filed with the SEC
Shelf Registration Information filed with the SEC Flexibility Securities sold when funds are needed

25 The Private Placement Direct sale of securities Reduces selling costs Features can be tailor made for both parties

26 Financial Intermediaries
Middleman Creation of Claims

27 Financial Intermediaries
Each financial intermediary creates claims on itself and transfers funds from savers to firms governments people who need funds

28 The Variety of Financial Intermediaries
Commercial Banks Savings and loan associations Mutual savings banks Credit unions Life insurance companies Pension plans Money market mutual funds

29 Assets and Liabilities
Commercial Bank’s Assets and Liabilities Importance of loans Importance of deposit liabilities Small equity base

30 Variety of Deposits Demand deposits (checking accounts) Savings account Certificates of deposits Negotiable CDs

31 Reserves Required reserves Excess reserves Secondary reserves

32 Regulation of Depository Institutions
The Depository Institutions Deregulation and Monetary Control Act of 1980 Subject to the Regulation of the Federal Reserve

33 Federal Deposit Insurance Corporation (FDIC)
Insures accounts up to specified limit Another source of regulation of banks Add stability to the banking system

34 Regulatory Trends The consolidation of regulation through the Federal Reserve Reduced or blurred the distinctions among the different types of depository institutions and other financial institutions (e.g., brokerage and insurance firms)

35 Life Insurance Companies and Pension Plans
Alternatives for savings May serve as financial intermediaries

36 Money Market Mutual Funds
A specialized investment company Makes only short-term investments Acquires money market instruments Shares in money funds have become popular investments

37 The Money Market Instruments
Certificates of deposit (CDs) Negotiable CDs U.S. Treasury bills

38 The Money Market Instruments
Commercial Paper Repurchase agreements (repos) Bankers' acceptances Tax (or revenue) anticipation notes Eurodollar CDs

39 The Money Market Instruments
These instruments are safe liquid Offer competitive short-term rates


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