Raising Capital in the Financial Markets
CHAPTER 14
Raising Capital in the Financial Markets
CHAPTER ORIENTATION
This chapter considers the market environment in which long-term capital is raised. The underlying rationale for the existence of security markets is presented, investment banking services and procedures are detailed, private placements are discussed, and security market regulation is reviewed.
CHAPTER OUTLINE
I. The mix of corporate securities sold in the capital market.
A. When corporations raise cash in the capital market, what type of financing vehicle is most favored? The answer to this question is corporate bonds. The corporate debt markets clearly dominate the corporate equity markets when new (external) funds are being raised.
B. From our discussion on the cost of capital, we understand that the U.S. tax system inherently favors debt as a means of raising capital. During the 1999-2001 period, bonds and notes accounted for about 76.9 percent of new corporate securities sold for cash.
II. Why financial markets exist
A. Financial markets consist of institutions and procedures that facilitate transactions in all types of financial claims.
B. Some economic units spend more than they earn during a given period of time. Some economic units spend less than they earn. Accordingly, a mechanism is needed to facilitate the transfer of savings from those economic units that have a savings surplus to those that have a savings deficit. Financial markets provide such a mechanism.
C. The function of financial markets then is to allocate savings in an economy to the ultimate demander (user) of the savings.
D. If there were no financial markets, the wealth of an economy would be lessened. Savings could not be transferred to economic units, such as business firms, which are most in need of those funds.
III. Financing business: The movement of funds through the economy.
A. In a normal year the household sector is the largest net supplier of funds to the financial markets. We call
Raising Capital in the Financial Markets
CHAPTER ORIENTATION
This chapter considers the market environment in which long-term capital is raised. The underlying rationale for the existence of security markets is presented, investment banking services and procedures are detailed, private placements are discussed, and security market regulation is reviewed.
CHAPTER OUTLINE
I. The mix of corporate securities sold in the capital market.
A. When corporations raise cash in the capital market, what type of financing vehicle is most favored? The answer to this question is corporate bonds. The corporate debt markets clearly dominate the corporate equity markets when new (external) funds are being raised.
B. From our discussion on the cost of capital, we understand that the U.S. tax system inherently favors debt as a means of raising capital. During the 1999-2001 period, bonds and notes accounted for about 76.9 percent of new corporate securities sold for cash.
II. Why financial markets exist
A. Financial markets consist of institutions and procedures that facilitate transactions in all types of financial claims.
B. Some economic units spend more than they earn during a given period of time. Some economic units spend less than they earn. Accordingly, a mechanism is needed to facilitate the transfer of savings from those economic units that have a savings surplus to those that have a savings deficit. Financial markets provide such a mechanism.
C. The function of financial markets then is to allocate savings in an economy to the ultimate demander (user) of the savings.
D. If there were no financial markets, the wealth of an economy would be lessened. Savings could not be transferred to economic units, such as business firms, which are most in need of those funds.
III. Financing business: The movement of funds through the economy.
A. In a normal year the household sector is the largest net supplier of funds to the financial markets. We call