Outline 21699

1
Outline 2/16/99

• Current events
• Financial services
• Securities firms
• Finance companies
• Mutual funds
• Chapters 5,6,7 (short)

2
Question from last period

• Pure loss 3.6-1.96
• Expenses 0.066 x 3,600,000 237,600
• Dividends 0.012 x 3,600,000 43,200
• Investment returns 170,000
• Net Profits

1,640,000 -237,600 -43,200 170,000 1,592,000
3
Question 5-1

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

4
Question 5-3

• What are the different firms in the
  securities industry and how do they differ?
• 1. National full service, corporate and retail
  (Merrill Lynch)
• 2. National corporate finance and trading
  (Goldman Sachs, Morgan Stanley)
• 3. Security firms subsidiaries of commercial
  banks
• 4. Specialized discount brokers
• 5. Regional security firms

5
Major activities

• Investing
• Investment banking

6
Underwriting Securities

• Private vs. public
• Best efforts vs. firm commitment
• Questions Chapter 5 16-18

7
5 -16

• An investment banker agrees to underwrite a
  5,000,000 bond issue for the JCN Corporation in
  a firm commitment basis. The investment banker
  pays JCN 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?

8
5-17

• An investment banker pays 23.50 per share for
  3,000,000 shares of KDO Company. It then sells
  the shares to the public fir 25. How much money
  does KDO receive? What is the investment bankers
  profit? What is the stock price of KDO?

9
Question 5-18

• The MEP Company has issues 5,000,000 new shares.
  Its investment banker agrees to underwite these
  shares on a best efforts basis. The investment
  is able to sell 4,200,000 shares for 54 per
  share. It charges MEP 1.25 per shares sold. How
  much money does MEP receive? What is the
  investment bankers profit? What is the stock
  price of MEP?

10
Major activities

• Investing
• Investment banking
• Market making Trading

11
Trading

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

12
Major activities

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

13
Trends

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

14
Regulations

• SEC
• NYSE
• NASD

15
Question 5-20

• Which is likely more costly to underwrite,
  corporate debt or equity? Explain.

16
Finance Companies

• Fastest growing segment of FI groups
• GMACCM GMAC

17
Finance Companies-- Types

• sales finance
• personal credit
• business credit
• Differ from banks?
• Types of lending
• consumer
• business
• mortgage

18
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

19
Securitization

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

20
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

21
Regulations

• Compared to commercial banks

22
Question 6-9

• What advantages do finance companies have over
  banks in offering services to small business
  customers?
• Question 8
• Why is the rate charged on motor vehicle loans
  often higher for a finance company than a
  commercial bank?

23
Mutual Funds

• 7-1
• What is a mutual fund and in what sense is a
  mutual fund a financial intermediary?
• 7-4
• What economic reasons can you provide for the
  existence of mutual funds?

24
Mutual Funds

• Trends causes
• Types of funds
• long-term vs. money market
• tax exempt
• bond vs. equity
• Load vs. no load
• open ended vs. close ended

25
7 - 8

• How does the risk of short-tem funds differ from
  long term funds?

26
Regulation

• SEC
• NASD

27
Valuation -- Net Asset Value (NAV)

• Three factors affecting NAV
• 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

28
7-11

• 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
• a. What is NAV of each?
• b. Assume 100 shares of ATT are added to A. What
  is NAV of A?
• c. If ATT increases to 105 and Toro declines to
  45, how does that impact NAV? Assume Fund A has
  only 100 shares of ATT.

29
7-12

• A mutual fund has 200 shares of Fiat, Inc.,
  currently trading at 14 and 200 shares of
  Microsoft, currently trading at 140.
• NAV?
• If investors expect the price of Fiat shares to
  increase to 18 and Microsofts to decline to
  110 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?