Chapter 22: Investment Banks EXAM STUDY GUIDE 2024 LATEST UPDATE WITH 100% CORRECT ANSWERS

Investment Banks Everything from buying stock to raising money through a bond issuance typically requires an investment banking firm Investment banks perform a variety of crucial functions in financial markets, especially in the capital market Why are investment banks important to the capital market The primary markets consist of the corporations seeking funding and the investment banks willing to fund the corps investments -IB will decide the best route to raise capital for the company -The IB will form a syndicate of investments banks to help underwrite the transaction. -This diversifies the risk of any poor investments by spreading the risks out over numerous investment banks Brainpower Read More Previous Play Next Rewind 10 seconds Move forward 10 seconds Unmute 0:00 / 0:00 Full screen What next step will the company do? The company will sell a specified amount of shares of the security chosen to the investment bank syndicate in exchange for the funds they need for their investment -investment banks are also responsible for a company's initial public offering (IPO) When/how were investment banks created? Investment banks were essentially created in the US by the passage of the Glass-Steagall Act What are the main roles of Investment banks? 1) underwriting stocks and bonds 2 ) equity sales 3) mergers and acquistions Underwriting Stocks and Bonds The process of underwriting a stock or a bond issue requires that the investment banker PURCHASE the entire offering at a predetermined price and then resell the offering (Securities) in the market. The services provided during this process include: Services provided during this process include 1) giving advice 2) filing documents 3) underwriting, best efforts or private placement Mergers and Acquisitions Investment bankers may assist both acquiring firms and potential targets -deal may be a hostile takeover, where the target does not wish to be acquired -investment bankers will assist in all area, including deal specifics, lining up financing, legal issues etc. Other services IBs often create new financial instruments by combining existing ones- and then putting up the new instrument for sale to investors financial engineering the development of new financial instruments or investment strategies using sophisticated quantitative models -these engineers apply knowledge from several academic fields (corporate finance, economics/statistics Financial engineering (controversies) some believe that it increases any economy's systemic risk instead of decreasing it -EG. financial engineering is largely reponsible for the development and use of derivatives like credit-default swaps and mortgage backed securities in the financial recession (2008) How do the investment banks generate profits from capital markets ? IB charges a fee, receives shares of stock, but is responsible for selling shares to the public -the risk: is that the value of the shares will drop lower than the price they bought them for. The company can hold the shares of the IPO for up to 2 years but a company's stock price will determine the returns on investment Stock increase a company that has a stock price increase after the IPO will provide good returns for the IB BUT a lower stock price will increase the risk of investment bank failure. This means the IB syndicate burdens the risk of an IPO Securities brokers and dealers conduct trading in secondary markets Brokers are pure middlemen who act as agents for investors in the purchase or sale of securities. their function is to match buyers with sellers Dealers link buyers and sellers by standing ready to buy and sell securities at given prices. Dealers hold inventories of securities and make their living by selling these securities for a slightly higher price than they paid for them Add or remove terms