The International Securities Market and Instruments

Markets where foreigners can both borrow and

lend money Important international financial centers are London, Tokyo and New York Important financial entrepots or channels are Switzerland, Luxembourg, Singapore, Hong Kong, the Bahamas and Bahrain

 A Eurocurrency is a dollar or other freely

convertible currency deposited in a bank outside its country of origin E.g. US dollars on deposit in London become Eurodollars

 Eurobonds are bonds sold outside the countries in

whose currencies they are denominated

Eurobonds are similar in many respects to the

public debt sold in domestic capital markets

 The bond market is a financial market where

participants buy and sell debt securities , usually in the form of bonds is an estimated $82.2 trillion.

As of 2009, the size of the worldwide bond market

 Participants include:

Financial Institutions Governments International Organisations Corporate Issuers

The international bond market encompasses two market segments: 1. Foreign Bonds

2.

Eurobonds

 A foreign bond is one offered by a foreign

borrower to the investors in a national capital market and denominated in the nations currency
Example: A German MNC issuing dollar-

denominated bonds to U.S. investors

 A Eurobond issue is one denominated in a

particular currency but sold to investors in national capital markets other than the country that issued the denominating currency
Example: A Dutch borrower issuing dollar-

denominated bonds to investors in the U.K., Switzerland, and the Netherlands

 The markets for foreign bonds and Eurobonds

operate in parallel with the domestic national bonds market and all the three compete with one another
Eurobonds are known by the currency in which

they are denominated e.g. Eurodollar bonds, Euroyen bonds, EuroSF bonds etc.

 Sometimes they have colourful names like Yankee

bonds ( U.S. dollar), Samurai bonds (JPY), Bulldogs (Stg. Pound)

About 80 percent issues are Eurobonds issues Eurobonds are usually bearer bonds

Global Bonds:
A global bond issue is a very large international

bond offerings by a single borrower that is simultaneously sold in North America, Europe and Asia
The issues were first offered in 1989

 Straight Fixed-Rate Issues:

Principal payable on maturity; coupon payments on annual basis

 Euro-Medium-Term Notes (Euro-MTNs):

Fixed rate notes with maturities from less than a year to about ten years Euro MTN issue is partially sold on a continuous basis

 Floating Rate Notes (FRNs):

Medium-term bonds with coupon payments indexed to some reference rate (e.g. 3 month ) Coupon payments are usually quarterly or semiannual

 Equity-Related Bonds:

1.

Convertible Bond: - allows the investor to exchange the bond for a predetermined number of equity shares of the issuer

 Equity-Related Bonds:

2.

Bonds with equity warrants: - a straight fixed-rate bond with the addition of a call option (warrant) feature. The warrant entitles purchase of certain number of equity shares at a prestated price

 Zero-Coupon Bonds:

Zero- coupon bonds are sold at a discount from face value and do not pay any coupon over their life

 Dual-Currency Bonds:

A dual-currency bond is a straight fixed-rate bond issued in one currency, say, euro, that pays coupon in the same currency At maturity, the principal is repaid in another currency, say, US dollars

Instrument

Frequency of Int. payment Annual

Size of Int. payment Fixed

Payoff at Maturity

Straight fixed-rate

Currency of issue

Floating-rate note
Convertible bond Straight fixed-rate with equity warrants

Quarterly Or semi-annual
Annual Annual

Variable
Fixed Fixed

Currency of issue
Currency of issue or conversion to equity shares Currency of issue plus equity shares from exercised warrants

Zero-coupon bond

None

Zero
Fixed

Currency of issue
Dual currency

Dual-currency bond Annual

 Primary Market:

A borrower desiring to raise funds by issuing Eurobonds to investors contacts an investment banker

 Secondary Market:

Eurobonds initially purchased in the primary

market may be resold prior to their maturity in the secondary market It is an over-the-counter market with principal trading in London and some other centers such as Zurich, Luxembourg, Frankfurt and Amsterdam

To Borrowers: Size and depth of the market are large Freedom and flexibility not found in domestic

markets Relatively low costs ( around 2.5%) Interest costs are competitive ( especially dollar Eurobonds) Long maturity periods suitable for long-term funding ( 30 years) Sound institutional framework for underwriting, distribution and placement of securities

To Investors:
Interest can be paid free of income tax

Issuers are of high credit standing : government,

international organisations or MNCs Convertible Eurobonds value addition Rated instruments

 New York Stock Exchange (NYSE) buyers and sellers meet at the trading post to negotiate specialist acts as a dealer (market maker), as necessary American Stock Exchange (AMEX) trading system same as NYSE

National Association of Securities Dealers

Automated Quotation System (NASDAQ)

multiple dealers (market makers) compete for

transactions in a given stock each dealer/market maker posts a bid and offer price on the systems network

 New York Stock Exchange (NYSE)

American Stock Exchange (AMEX)

NASDAQ (not technically an exchange) Regional Exchanges
Midwest Pacific Philadelphia Boston

Cincinnati

 Japan Tokyo plus 7 others

United Kingdom London

Germany Frankfurt France Paris

Hong Kong
Canada Toronto

 Receive and track orders

Find other parties

Negotiate prices Server as focal point trading

Execute orders

 Smooth out temporary supply/demand imbalances

Supplies immediacy

Provide better price information

Privileged access to order flow and limit order

information
Act as auctioneer

 Market order
an order for the broker and market specialist to transact at the

best price available when the order reaches the post

Limit order
an order to transact at a specified price (the limit price)

 A way to bet that a security will fall in value

Borrow the security and sell it

Economic value of short selling

Limit upward bias

Limits on short selling

Tick rules Risk

 Borrow funds using securities as collateral

Margin Requirements
Initial margin Maintenance margin Margin call

 The Dow Jones Industrial Average (the DJIA) a price-weighted inex of the values of 30 large (in terms of sales and total assets) corporations The NYSE composite index a value-weighted index of all common stocks listed on NYSE the Standard & Poors 500 index a value-weighted index of the stocks of 500 of the largest U.S. corporations listed on the NYSE and NASDAQ The NASDAQ composite index a value-weighted index of three categories of NASDAQ companies: industrials, banks, and insurance companies

 Dow Jones Industrial Average (DOW)

S&P 500
NYSE AMEX

NASDAQ
Wilshire 5000 (also 4500) Russell 2000 (also 3000 and 1000)

Value Line

 World
Morgan Stanley (EAFE)

Country
Japan Nikkei 225, Nikkei 300, Topix UK FTSE 100, FTSE 250 Germany DAX France CAC Hong Kong Hang Seng

Canada Toronto 300 Composite

 Three forms of market efficiency

Weak form (random walk) Current prices reflect past prices Technical analysis is useless Semi-strong form Prices reflect all public information Most financial analysis is useless Strong form Prices reflect all that is knowable Nobody consistently makes superior profits

All information relevant to a stock

Information set of publicly available information

Information set of past prices

 Small firm

Price to book (earnings)

Neglected firm Calendar effects
January Turn of the month Weekend

Weather

 Does Not Say: Prices are uncaused Investors are foolish and too stupid to be in the market All shares of stock have the same expected returns Investors should throw darts to select stocks There is no upward trend in stock prices Does Say Prices reflect underlying value Financial managers cannot time stock and bond sales Sales of stock and bonds will not depress prices

You cannot cook the books

 Why Doesnt Everyone Believe It?

There are optical illusions, mirages and apparent

patterns in charts of stock and market returns The truth is less interesting There is some evidence against efficiency
Seasonality
Small vs large stocks Value vs growth stocks

Tests of market efficiency are weak

 Stock markets and participants are subject to regulations

imposed by the Securities and Exchange Commission (SEC) Main emphasis of SEC regulation is on full and fair disclosure of information on securities Securities Act of 1933/Securities Exchange Act of 1934 Delegates certain regulatory responsibilities to the markets for the day-to-day surveillance of activity Recently imposed regulations on financial markets intended to reduce excessive price fluctuations

 European markets becoming an increasing force with

introduction of a common currency, the Euro International stock markets allow investors to diversify by holding stocks issued by corporations in foreign countries Increased risk due to less complete information about foreign stocks, foreign exchange risk, and political risk

 Why Raise Funds Outside Domestic Markets?

Domestic market not sufficiently developed to supply

the funds needed Reduced costs (assumes markets not completely integrated) Diversify funding sources Foreign currency exposure management