1. Securities Firms (ch21) – Fin 331 1 Securities Firms Investment Banking Business Brokage Service Investment Funds –Mutual Funds –Hedge Funds

2. Securities Firms (ch21) – Fin 331 2 Investment Banking Investment banks’ major responsibility is to assist in the initial sale of securities in the primary market, namely, underwriting stocks and bonds –Include both IPOs and seasoned offers Glass-Steagall Act separates commercial banking from investment banking

3. Securities Firms (ch21) – Fin 331 3 Underwriting Stocks and Bonds Giving Advice When to offer? At what price? Filing Documents SEC Registration statement Prospectus Underwriting Syndicate Tombstones Marketing Outcomes Fully subscribed Undersubscribed Oversubscribed Best Efforts

4. Securities Firms (ch21) – Fin 331 4 Ten Largest Underwriters in the U.S.

5. Securities Firms (ch21) – Fin 331 5 Other Investment Banking Service Private Placement Mergers and Acquisitions –Active in this market since 1960s –Serves both acquirers and target firms

6. Securities Firms (ch21) – Fin 331 6 Securities Brokers and Dealers Brokerage Service a. Securities Orders Market Order Limit Order – buy with maximum acceptable price and sell with minimum price short sell b. Other Services Margin Credit brokage-based cash management account c. Full-Service Brokers – provide research and investment advice d. Discount Brokers – execute trades on request Securities Dealers Market Makers – increase market liquidity

7. Securities Firms (ch21) – Fin 331 7 Box 1: Using the Limit-Order Book Unfiled Circuit City Limit Orders __________________________________ Buy OrdersSell Orders 37 100 37.125 300 37.25 100 37.375 200 37.50 500 37.625 100 Any deal now?

8. Securities Firms (ch21) – Fin 331 8 Orders 1. 200-share market buy order 2. 300-share limit sell order at 37.125 3. 500-share limit buy order at 36.875 The order book is:

9. Securities Firms (ch21) – Fin 331 9 Short-selling – borrow shares Joel shorts 200 shares of IBM stocks at $50/share. Later on the stock price goes to $40/share. How much profit/loss Joel has made in this transaction?

10. Securities Firms (ch21) – Fin 331 10 Buy-on-margin – borrow money Amy bought 10,000 shares of IBM stocks at $50/shares with her margin account. The IBM price increases to $60 later. How much profits/losses Amy could make?

11. Securities Firms (ch21) – Fin 331 11 Types of Mutual Funds Balanced Funds Bond Funds Value Funds Growth Funds Growth and Income Funds Index Funds Money Market Mutual Funds

12. Securities Firms (ch21) – Fin 331 12 Mutual Funds on the Rise

13. Securities Firms (ch21) – Fin 331 13 Distribution of Mutual Fund Net Assets by Type of Fund

14. Securities Firms (ch21) – Fin 331 14 Household Ownership of Mutual Funds

15. Securities Firms (ch21) – Fin 331 15 Fee Structure of Investment Funds Open-End Fund Load Funds No-Load Funds Closed-End Fund

16. Securities Firms (ch21) – Fin 331 16 Fees in addition to sales commissions Contingent deferred sales charge Redemption fee Exchange fee Account maintenance fee 12b-1 fees

17. Securities Firms (ch21) – Fin 331 17 Regulations of Mutual Funds All funds to register with the SEC Provide two types of documents: prospectus and shareholder report (page 589)

18. Securities Firms (ch21) – Fin 331 18 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$35,000,000 Bonds$15,000,000 Cash $3,000,000 Total value of assets$53,000,000 Liabilities -$800,000 Net worth $52,200,000 Outstanding shares 15 million NAV =

19. Securities Firms (ch21) – Fin 331 19 Hedge Funds 1. Take advantage of unusual spreads between security prices 2. Often highly leveraged 3. Relatively unregulated