Financial Markets
Explain what is a primary and secondary market. What is the difference?
Original issue of financial securities is sold via primary market through public offering of private placement.
Existing securities are traded on secondary market.
Which security is used more often to raise external capital: bonds or shares? Why?
Bonds are used more often.
Reason: cheaper to issue, tax advantage.
If a bond is callable, what does it mean?
https://drive.google.com/file/d/1v6R1C9K5JA0CEE32P1ptEK9mqsam2Fgh/view?usp=drive_link
What is the market capitalization of META?
$1.455 trillion
At the time of IPO how such was Facebook's market valuation?
$104 billion
What is IPO
Initial Public Offering
Sale of shares investors through primary market
Name 2 grades of credit rating.
Investment grade
Junk bonds/speculative
Name coupon rate and maturity of the bond
https://drive.google.com/file/d/1gbArojImubJ-YnqfAcXukUUOQ8mpOdwk/view?usp=sharing
9.98%
2047
What was the lowest Price of NVIDIA during the last year and in which month exactly?
https://drive.google.com/file/d/1epLZl88WFw9V2mbkxjNhFb2oB5ZA3NLB/view?usp=sharing
Price: $95.04
Month: April 2025, but May 2025 is acceptable.
Explain the bidding process by investors for IPO shares.
Give an example in numbers.
Bidding process is when investors request to purchase for more shares than they expect to receive.
Request to purchase: 1 million shares
Actually receive: 0.5 million shares
What is Due Diligence? And when is it performed?
Due diligence is detailed study of the company. It is carried out by an investment bank/underwriter before the IPO or major investment.
Name 3 credit rating companies.
Define what they do.
Standard and Poor's
Moody's
Fitch
Provide credit rating for the bonds of corporations and governments.
Name at least 4 components of the bond.
Face value/ Par value
Ticker
coupon rate
coupon payment
Price
Maturity
YTM
Ticker
Today's Price
Yesterday's Price
% change from yesterdayTicker: AAPL
Today's Price: $253.50
Yesterday's Price: $258.86
% change from yesterday: -2.07%
How much was the fees Morgan Stanley and other companies in syndicate earn for taking Facebook public?
$176 Million
Underwriter is an investment bank that helps a corporate sell its securities and deal with markets.
Syndicate is a group/network of underwriters (investment banks) that help market the security
who prefer dividend payout
who dont want a dividend payout
Provide reasons.
Small investor prefer payout because they are motivated by consistent cash flow from earnings.
Wealthy investor prefer no payout, or non-cash payout to avoid taxes.
Explain Seesaw effect:
Bond Price and YTM relationship
Price ↑ → Yield ↓
Price ↓ → Yield ↑
What is a dividend?
What is a dividend policy?
Dividends are earnings of the company distributed to the shareholders as cash or stock.
Dividend policy is a framework/documents that determines how much of the profit is to be paid out as dividends and how much is to be retained and reinvested into the business.
Based on the Facebook IPO case, explain why and against who investors filed lawsuits
Give 2 reasons
1. against NASDAQ for technical issues
2. against Facebook and underwriters for not disclosing lower forecasts
Explain the following corporate actions:
Stock split 3:1
Reverse stock split 1:3
Spinoff
Merger and acquisition
Stock split: each share receives 2 more
Reverse stock split: 3 shares become 1
Spin off: subsidiary breaks off from main company and share separate
M&A: One company buys another one and this is reflected in the price.
Give 5 differences between bonds and stocks
-debt vs equity
-fixed vs non-fixed payments
-no ownership vs ownership
-no voting rights vs voting rights
-priority claim vs lower priority in claim
-lower risk vs higher risk
-lower return vs higher return
Exxon Mobil bond with $1,000 face value has a coupon rate of 4 percent and a 7-year life before maturity. Investors require at least 6% annual return.
Calculate Bond price. Explain why it differs from Face Value.
$887.
Give 4 differences between preferred stock and common stock
-fixed vs non-fixed dividends
-no ownership vs ownership
-no voting right vs voting rights
-higher claim vs lower claim
Based on the Facebook IPO case, explain why the Price of the stock fell during the first days and the first quarter.
Mention at least 4 reasons.
1. Technical issues at NASDAQ due to high volume that delayed trade
2. Company offered more shares that investors expected
3. IPO price was higher than expected ($38 instead of $35)
4. Bankers reduced future earnings estimates of Facebook