MAS Capital Markets

A financial market where longer-term debt instruments and equity instruments are traded

Capital Markets

Participants of the capital market

National and local governments

Corporations

The first time sale of securities

Initial Public Offering

What are subsequent sale of securities

simply Primary Market Transactions

Where can secondary market transactions occur

Organized Exchange or Over the Counter Exchange

What are the capital market securities

Bonds

Ordinary equity shares

Preferred Equity Shares

A long term promissory note issued by the firm

Bond

Tangible evidence of debt issued by a corporation or government and represents a loan made by investors to the issuer

Bond Certificate

Expected cash flows of bonds

Periodic interest payments

Principal returned at maturity

An agreement where an investment bank buys an entire new securities issue directly from the issuer, guaranteeing capital of the issuer.

Firm Commitment Underwriting

Advantages of bonds from the issuer’s perspective

Less expenses because of lower rate of return

Bondholders have no share in net income

Bondholders do not have voting rights

Bond flotation costs are lower than equity’s

Disadvantages of bonds from the issuer’s perspective

Interest payments must be paid

Fixed interest payments are disadvantages for entities with unstable earnings

Maturity requires major cash flow

Bond indenture covenants may limit firm’s flexibility

Other term for transactions costs and fees

Flotation Costs

What expense is tax deductible

Interest expense

What happens when interest isnt paid

Firm may be forced into bankruptcy

Legally binding promises in a bond contract that protect investors

Bond indenture covenant

Face value of the bond returned to the bondholder at maturity

Par Value

Percentage of par value that will be paid annually as interest

Coupon Interest Straight

Length of time the par value is returned to the bondholder and terminates the bond

Maturity

Agreement between the form issuing the bonds and the bond trustee or bondholder. It provides specific terms, agreements, rights, and abilities

Indenture

Ratio of the annual interest payment to the bond’s market price

Current Yield

The bond’s internal rate of return. The discount rate that equated the present value of the interest and principal

Yield to Maturity

What do you call issuance of bond at a price higher than its par value

Premium

What do you call issuance of bond at a price lower than its par value

Discount

When issued at premium, YTM is?

lower

When issued at discount, YTM is?

higher