Financial disruptions Essay
1. Regulations (Chapter 10)
How have recent financial disruptions changed the ways that financial markets are regulated?
The subprime mortgage crisis is a huge example of a financial disruption that changed the ways that financial markets are regulated. Since bankers were giving out subprime mortgages that the house buyers could not repay, the house buyers all obtained way too much debt that they could not pay back. Because people couldn’t pay back their debts then they got foreclosed. Since this screwed up our entire economic status there have been a lot of regulations on that market.
2. Bonds (Chapter 10)
Describe the basic features and characteristics of bonds. What is a convertible bond and why do investors find such bonds attractive? What advantages do convertible bonds have for the issuing firms? What stakeholder group might be harmed when a firm issues convertible bonds?
A formal debt instrument issued by a corporation or government entity and is anywhere from 10 years to thirty years long. A convertible bond is a bond or share of preferred stock that gives its holder the right to exchange it for a stated number of shares of common stock. Investors like convertible bonds because it allows them to gain from an increase in the price of common stock, while limiting their risk if the price of the stock falls. The firm can also benefit from issuing convertible bonds because the popularity of this feature with investors allows it to offer a lower coupon rate on convertible bonds, thus reducing its fixed payments. The important group that can be harmed by convertible bonds is the corporation’s existing stockholders.
3. Security Markets (Chapter 10)
What is the key difference between the primary and secondary securities markets? Why are the trades that occur on the secondary market important to a firm’s management?
· Primary securities: The market where newly issued securities are traded. The primary market is where the firms that issue securities raise additional financial capital. · Secondary securities: The market where previously issued securities are traded. The secondary market dictates what the value of a firm is. If there is a lot of trading going on for a certain firm’s securities then the value of the firm will go up. But if everyone sells the securities in a firm then the firm will lose a lot of money and value.
4. Stockbrokers (Chapter 10)
What service does a stockbroker offer? Briefly describe the difference between a full service broker and a discount broker. How does a broker handle a market order? How does a broker handle a limit order?
· A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission. · Full service: provide a variety of services, such as personal advice, retirement planning and tax tips. Full-service brokers offer a wider selection of investment products such as derivatives and insurance, as well as access to the company’s research. Full service brokers are paid based on commission. · Discount: do not provide investment advice. Fees are kept low because discount brokers offer fewer products.
They are paid on salary, not commission.
Market order: An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the buy/sell price or the timeframe in which the order can be executed. · Limit order: An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Because the limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.
5. Information about the Stock Market (Chapter 10)
In addition to reporting a stock’s closing price, most financial websites provide additional information about the stock, including its market capitalization, price-earnings ratio, earnings per share and dividend and yield. Define each of these measures and provide a brief explanation of its significance.
Market capitalization: The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures. · Price earnings ratio: A valuation ratio of a company’s current share price compared to its per-share earnings. ·
Earnings per share: The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability. · Dividend and yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: