ib exam 1

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services

store of value

Money that keeps its value if it is stored rather than used, can be used later, represents labor

unit of account

a measure used to set prices and make economic calculations,

types of money in history

salt, copper, peppercorns, tea, barley, cattle, gold and silver

first coins

Lydians (Turkey), 650 BC

first paper money

China, Song Dynasty, promissory notes 7th century

Judaism view on money

pragmatic, realistic, banking

Hinduism view on money

pro-wealth, against illegal + greed, banking, low interest

Christian view on money

money is seen as corruption, no usury (lending)

Islamic view on money

anti-cash interest, adapt with debt intstruments

examples of tech transforming money

internet, printing presses, telecom, transportation,

Origin of Banking

2000 BC in Assyria + Babylon, grain loans + gold deposits, storage fees

Medici Bank

1397 Italian famous bank

Oldest bank in existence

Banca Monte dei Paschi di Siena S.p.A. (Siena, Italy) founded in 1472 [underwent a financial restructuring in 2017 to avoid liquidation; combination bail-in (bondholders) and bail-out]

Merchant Banking

bank acted as principal, not just intermediary

Private Banking

banking services for wealthy individuals and families

Central Banking

banking services for government, can lend to other banks

Oldest Central Bank

Sveriges Riksbank, 1668 Sweden, issues Noble Prize in Economics each year

Bank of England

1694, central Bank of England, created to finance wars

Glass-Steagall Act

(Banking Act of 1933) - Established the FDIC and prevented Universal Banks. Repealed in 1999, allowing banks to be Universal, established 25k deposit insurance

Glass-Steagall Repeal

Power of Deutsche Bank in 1990s, international banks were mostly Universal

Commercial Banking

take deposits and make loans, checking accounts, mortgages, consumer banking

Investment Banking

Financial activities that involve underwriting new security issues and providing advice on mergers and acquisitions, corporate finance

Universal Banking

Commercial + Investment Banking

Colonial Money

Massachusetts, fiat paper money 1690 for war, pounds, shillings, pence

British Tax Problems

Currency Acts of 1751, 1764, 1773, regulated paper currency in New England, other colonies, lessened restrictions

American Revolution

Washington + Hamilton begging Congress for money, no central bank, no American taxes, European loans for $12 million

Continentals

Paper fiat money issued by Congress to finance the revolution; overprinting/inflation brought value to 1%, $241 million issued

Robert Morris

Went bankrupt financing the American Revolution

First quasi-central bank

Bank of North America 1781, weak American finances, sold shares in US in IPO, replaced Bank of Pennsylvania

Bank of New York

BNY Mellon now, founded by Alexander Hamilton,

Hamilton Report on Credit

Assumption of state debt (mostly northern), transfer debts to federal government, national debt

First Bank of the United States

1791-1811, Created by Alexander Hamilton, the first Secretary of Treasury, owned 25% of all deposits, controversial

Alexander Hamilton

-First Secretary of the Treasury

-Leader of the Federalist Party

US Constitution

regulate interstate commerce, power to tax, regular coin money and value, no mention of banks

Aaron Burr

Jefferson's Vice President; killed Alexander Hamilton in a duel, founded the Manhattan Company, used for providing water to NYC to join banking system

Second Bank of the United States

1816-1836, President Madison, and became a depository for federal funds and a creditor for (loaning money to) state banks. blamed for the panic of 1819, corruption, used for War of 1812 funding

Jeffersonians

favored a weak central government, against central banks, 20 year charter compromise of central banks

Andrew Jackson

7th President, hated banks, removes government deposits, can't get rid of banks so settles for 20 year charter

Post-Jackson Banking

Many states had own currencies and banks, weak central government, no deposit insurance, discounted currencies

Double Liability

If bank closes, shareholders lose investment and must pay out share worth to depositors

Rise of NYC

NYSE formed (Buttonwood Agreement 1792), Erie Canal built (1821), passes Philadelphia and Boston

Civil War

Northern manufacturing economy with stronger financial infrastructure and Southern, plantation based, agriculture based (and slave based) economy

Cost of Civil War

$6.2 billion for North, $2.1 billion for South, North had more capital institutions compared to South paper cash

Jay Cooke

Raised $1.3 billion for North in bonds, major investment banker, South relied on paper currency

National Bank Acts

1863-1864, system of national banks, national currency, secondary market for treasury securities, no more state differences

Salmon Chase

passed Legal Tender Act, face on $1 bill, now $10,000, then said Act unconstitutional

Crime of 1873

cease minting silver dollars, retire Civil War-era greenbacks, and replace them with notes backed by the gold standard from an expanded system of national banks, 16oz Silver = 1oz Gold

Bland-Allison Act

1878, renewed silver dollar production

J.P. Morgan

bailed out US government during 1893 and 1907 Panic bank runs

Federal Reserve Act

1913, establishes Federal Reserve, central bank of the USA, sets interest rates, national banks in charge of regional banks, created Fed Reserve notes using gold standard, out of fear of reliance upon JP Morgan, opposite interest rate policy

Post Fed Banking

WWI helps, gradual central power, bank failures of 1920s, Great Depression, elimination of gold standard 1933, illegal to own gold

McFadden Act

1927, disallowed national banks from branching across states

Crash of 1929

October 24-29, 3 days of -10% stock market, started Great Depression, people + banks went bankrupt

American Banking Trends 1933-1999

movement from partnerships to public companies (Goldman, Morgan Stanley, Merrill Lynch)

Bretton-Woods

1944, new international monetary system, gold standard reinstated

Richard Nixon

1971, addressed inflation issue, closed the gold window, eliminates gold standard

May Day

May 1 1975, Charles Schwab, brokerages negotiate commissions instead of fixed rates, change world forever, no more cartel

Milken and Drexel

rise of junk bonds

Nationwide branch banking

1994, banks allowed across state lines, Riegle-Neal

NASDAQ Meltdown

2000-2001, -80%

Golden Age

2001-2008, high ROE, be like Goldman, technology advances, mortgage markets up

Recession

2008-2009, S&P -56.8%, Lehman bankrupt, BOA rescues Merrill Lynch

Goldman Bailout

AIG bailed out by govt, Goldman large share, credit default swaps not securities or insurance so did not need to pay off debts, through hedging AIG

Post-Recession

Fed Power rises

Dodd-Frank Act

2010, strengthened government oversight of financial markets and placed limitations on risky financial strategies

JOBS Act

2012, to ease burden of some federal regulations

Donald Trump

More federal deregulations

Japan

1980s largest banks in world, Tokyo Stock Market peaks in 1989, real estate bubble

China

Deng Xiaoping reforms Chinese economy 1970s, joins WTO 2001, now 2nd largest economy in world, 5% economy growth for years, Hong Kong IPO volume highest, 4 largest banks by asset size

Job of IB

facilitating transfer of assets (companies + securities) from one party to another, good sense of what things are worth, advice, support for transactions

What is an Asset?

1. generates cash flows now

2. avoid spending elsewhere

3. generates future cash

Valuation Theory

value of any security is the net present value of its future cash flows discounted at an appropriate, risk-adjusted discount rate

Challenges to Valuation

what are the future cash flows, appropriate discount rates, look at company/industry/spending trends, document everything, due diligence, use analyst growth rates when possible, 5 year model, use good reasoning

WACC

find equity through CAPM because historical not ROE bc future, find debt through bond ratings and bank loan rates

Terminal Value

Perpetuity Approach: FCF year 6

Exit Multiple Approach: Find multiplier on net income

Enterprise Value

must be allocated to debt, hybrid, preferred, and common equity

3 primary valuation methods

DCF, Comparable Companies, Comparable Transactions

Venture Capital

Look at TAM (total addressable market), management, scalable, many rounds, multiple seed rounds with share preferences

Dividend Discount Model

PV = D1/(r-g) = D1/(1+r)^1 + D2/(1+r)^2 + PV2/(1+r)^2

Lump Sum PV

PV = FV/(1+r)^t

Perpetuity

PV = C/r

Annuity/Mortgage

PV = C/r - C/(r(1+r)^t)

Bullet Bond

PV = C/r - C/(r(1+r)^t) + FV/(1+r)^t

Zero Coupon Bond

FV/(1+r)^t

Global Markets Overview

262 total exchanges, 91 Asia, 69 Americas, 56 Europe, 38 Africa

Global Market Cap

$100 trill, production $125 trill, 0.8x rev, $25 trill NYSE

Top 10 Exchanges

NYSE, NASDAQ, Shanghai, Euronext, Hong Kong, Tokyo, London

2021 IPO Activity

Record US Year, 1k deals, 490 2020, $287 bill raised, $174 bill 2020, SPACs 60% of deals

SPAC

Special Purpose Acquisition Company, "blank check company", shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional IPO

Direct Listing

company meets listing requirements, no capital needed, no IB, file S1 to raise $ and joins exchange (Roblox, Coinbase, Warby Parker)

Reverse Merger

private company buys a public company; it gives the private company the ability to publicly listed status quickly

Rule 4A1

cannot resell private stock after 2 years, if eligible can sell after 1 year, 6 months if not affiliated, for more mature companies, easier to sell restricted stock

Uplisting

going from OTC markets to NASDAQ or NYSE

League Table

Investment Bank rankings based on fee earning totals, usually Goldman, MS, JP Morgan, BOFA, Citi

All-time largest IPOs

Alibaba, Visa, Facebook, GM, Rivian, AT&T, Kraft, Uber