Outline February 7

1
Outline February 7

• Current events
• Financial services
• Securities firms
• Finance companies
• Mutual funds
• Chapters 3,4,5 (short)

2
Question 3-1

• In what ways are securities firms and investment
  banks financial intermediaries?

3
Question 3-4

• What are the different firms in the
  securities industry and how do they differ?

4
Major activities

• Investing
• Investment banking

5
Underwriting Securities

• Private vs. public
• Best efforts vs. firm commitment
• Questions Chapter 3 12-14

6
Question 3 -12

• An investment banker agrees to underwrite a
  500,000,000, ten-year 8 semiannual bond issue
  for the KDO Corporation on a firm commitment
  basis. The investment banker pays KDO on
  Thursday and plans to begin a public sale on
  Friday. What type of interest rate movement does
  the investment bank fear while holding these
  securities?

7
Question 3-13

• An investment banker pays 23.50 per share for
  4,000,000 shares of JCN Company. It then sells
  the shares to the public for 25. How much money
  does JCN receive? What is the investment bankers
  profit? What is the stock price of JCN?

8
Question 3-14

• The XYZ Company has issues 10,000,000 new shares.
  Its investment banker agrees to underwrite these
  shares on a best efforts basis. The investment
  is able to sell 8,400,000 shares for 27 per
  share. It charges XYZ 0.675 per shares sold.
  How much money does XYZ receive? What is the
  investment bankers profit? What is the stock
  price of XYZ?

9
Major activities

• Investing
• Investment banking
• Market making Trading

10
Trading

• Position trading
• Pure arbitrage
• Risk arbitrage
• Program trading

11
Major activities

• Investing
• Investment banking
• Market making Trading
• Cash management
• Mergers and acquisitions
• Others

12
Trends

• Balance sheet composition
• Stock market crash -- 1987
• Commission income
• Bank holding company competition

13
Regulations

• SEC
• NYSE
• NASD

14
Question 3-15

• Which type of security (debt or equity) accounts
  for most underwriting in the US?
• Which is likely more costly to underwrite,
  corporate debt or equity? Explain.

15
Finance Companies Historical Perspective

• Finance Companies originated during the
  depression
• GE capital corp.
• Competition from banks increased during the 50s
• Expansion of product lines
• GMAC is largest commercial mortgage lender in US
• Industry is highly concentrated
• Largest 20 firms account for 80 of assets

16
Finance Companies-- Types

• Sales Finance
• Personal Credit
• Business Credit
• Differ from banks?
• Types of lending
• consumer
• business
• mortgage

17
Balance sheet and trends

• Business and consumer loans are major assets
• 63 1997
• 95 1977
• Increases in real estate loans
• Growth in leasing

18
Balance sheet and trends

• Consumer loans
• Primarily motor vehicle
• Generally riskier customers than banks
• Increase in loan shark firms
• Mortgages
• Recent addition to finance co. assets
• May be direct mortgages
• Growth in home equity lending

19
Balance sheet and trends

• Business Loans
• Business loans comprise the largest portion
• Liabilities
• Commercial paper and other debt
• Finance firms are the largest issuers of
  commercial paper

20
Asset Securitization

• the process of pooling and packaging
  existing loans into securities suitable for
  resale
• Home mortgages Auto loans
• 5 Step process
• 1. loan originator
• 2. the loan purchase
• 3. the loan pooler
• 4. the guarantor (optional)
• 5. the investor

21
Securitization

• Asset is homogenous
• Terms on loans are standardized
• Asset-backed loans
• Often guarantors
• Investor purchases diversified pool

22
Captive Finance Companies

• Captive examples
• GMAC
• 80 Billion
• 68 of assets in receivables
• 40 liabilities notes payable
• 33 long term debt
• 16 equity
• Ford Motor Credit
• 70 billion
• 73 of assets in receivables
• 81 short term credit
• 16 equity

23
Regulations

• Fed reserve definition
• Firm, other than a depository institution, whose
  primary assets are loans to individuals and
  businesses
• Subject to state-imposed usuary ceilings
• Much lower regulatory burden
• Lower leverage

24
Summary question 5-6

• What advantages do finance companies have over
  banks in offering services to small business
  customers?
• Why is the rate charged on motor vehicle loans
  often higher for a finance company than a
  commercial bank?

25
Mutual Funds

• 4-1
• What is a mutual fund and in what sense is a
  mutual fund a financial intermediary?
• 4-6
• What economic reasons can you provide for the
  existence of mutual funds?

26
Mutual Funds

• Open ended
• Close ended
• End of 1997
• 5300 stock and bonds mutual companies
• 3.7 trillion

27
Size, structure and composition

• First mutual fund
• Slow initial growth
• Advent of money market mutual funds
• Regulation Q
• Total assets
• 1940 0.4 billion
• 1990 568 billion
• By asset size the second most important group

28
Types of funds

• Long term funds
• Short term funds

29
Regulation

• SEC
• NASD

30
Valuation -- Net Asset Value (NAV)

• Three factors affecting NAV / income on fund
• dividends and income earned on assets
• capital gains or losses when the assets are sold
• capital appreciation in the underlying value of
  the stocks held in the portfolio

31
4-14

• Open end Fund A has 100 shares of ATT _at_ 100 each
  and 50 Shares of Toro at 50 each.
• Closed-end fund has 75 shares of ATT and 100
  shares of Toro.
• Both funds issued 100 shares
• What is NAV of each?
• If ATT increases to 105 and Toro declines to
  45, how does that impact NAV?
• Assume another 100 shares of ATT are added to A.
  What is NAV of A if original price remains
  unchanged (100)?

32
4-12

• A mutual fund has 400 shares of Fiat, Inc.,
  currently trading at 7 and 400 shares of
  Microsoft, currently trading at 70.
• 100 shares outstanding
• NAV?
• If investors expect the price of Fiat shares to
  increase to 9 and Microsofts to decline to 55
  by the end of the year, what is the expected NAV
  at the end of the year?
• What is the maximum that the price of Microsoft
  can decline to maintain the NAV as estimated
  above?