• Securities*:- Stocks – equity financing- Bonds – debt financing- money market instruments:

• (derivatives, futures, options)

- * vrijednosnice, vrijednosni papiri

STOCKS & SHARES (1)

1. Most companies begin as ……………. limited companies.

2. If they want to grow they must ………. capital.

3. One way to obtain capital for growth is to ……….. , i.e. apply to the stock exchange to become a public limited comp.

4. Smaller or newer companies usually sell their shares on the ………….……. markets.

private

raise

go public

over-the-counter

REVISION

FOUR TYPES OF ORGANISATIONS IN THE PRIVATE SECTOR

1) WITH UNLIMITED LIABILITY• __________________• ______________

2) WITH LIMITED LIABILITY• ___________________• ___________________

Sole proprietorship

Partnership

Private limited company

Public limited company

REVISION LIMITED vs. UNLIMITED

LIABILITY FOR DEBT

In businesses with limited liability, owners are responsible* for their company’s debts up to a certain amount if it goes out of business, and do not have to sell their personal assets to repay the debts.

* ______

Source: Longman Business English Dictionary

liable

LIMITED COMPANIES

• a legal ______ (independent legal existence from its

shareholders)

• shareholders have limited liability (liable for the

amount of capital ________)

• in case of bankruptcy, assets are __________ and

the company is wound up.

entity

invested

liquidated

LIMITED COMPANIES• owners put ___ the capital (divided into shares) • shareholders can _______the AGM and take a

share of the profit through dividend• shareholders elect a _______________ and a

Chairperson• the BoD ________managers to run day-to-day

business• documents which need to be ________ : the

Memorandum of Association and Articles of Association

• Registrar of Companies issues a Certificate of Incorporation

up

vote at

Board of Directors

appoint

drawn up

PRIVATE →PUBLIC LIMITED COMPANY

FLOTATION / IPO / GOING PUBLIC• change a private company into a public company

by issuing shares and soliciting the public to purchase them

The bank has closed its initial public offer early because of overwhelming demand from investors.

The price of the company’ shares on the day it floated on the stock market beat all expectations.

Investors expected the share price to rise steeply after the company went public.

Source: Longman Business English Dictionary

MK, p 87: Reading Stocks and Shares

STOCKS & SHARES (2)5. Issuing shares for the first time is known as

………… a company (making a …….........) or _ _ _.

6. To guarantee to purchase all the securities at an agreed price on a certain day, if they cannot be sold to the public: ……………..

floating flotation

I P O

to underwrite

VOCABULARY

Companies going public… • i____ shares• a_____ to a stock exchange• j____ over-the-counter market• a____ to be quoted or listed on a stock

exchange• f_____ a large number of requirements • u___ an investment bank to u________the issue

ssue

pply

oin

pply

ulfill

se nderwrite

SynonymsBritish EnglishBritish English

companies

shares/stock EQUITIES

shareholders

ordinary shares

preference shares

flotation

Annual General Meeting

Articles of Association

Memorandum of Assoc.

authorised share capital

property

American EnglishAmerican English

corporations

stocks

stockholders

common stock

preferred stock

initial public offering

Annual Stockholders M.

Bylaws

Certificate of Incorporation

authorized capital stock

real estate

BONDS

MK, U 16 (p 81)

Bonds• What?

• Who?

• Why?

What? Who? Why? • borrowing/lending:

face value (principal)

coupon (interest rate)• bond issuers

governments (government bonds)

companies (corporate bonds)

• bondholders

-individuals & institutional investors

-selling or holding bonds until maturity

Debt Finance vs. Equity Finance (MK, p.81)

• Scan the text for comparison

Debt Finance vs. Equity Finance (MK, p.81)

BONDS FOR INVESTORS FOR ISSUERS

ADVANTAGE

DISADVANTAGE

Debt Finance vs. Equity Finance (MK, p.81)

BONDS FOR INVESTORS FOR ISSUERS

ADVANTAGEgenerally safer bond interest is tax

deductibleWHAT DOES IT MEAN?

DISADVANTAGEshares pay a higher return

debt increases a company’s financial riskHOW?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?

• Who are market makers?

• Bid vs. offer price?

• What is a spread?

• What is inversely related?

• What does the yield of a bond depend on?

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-e_____ stock (UK)• Who are market makers?Banks & b________ companies which q____ bid and offer price.• Bid vs. offer price?_____ – the highest price that the buyer is willing to pay

_____ – the price asked by sellers• What is a spread?D________ between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?I_____ r____ in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?I______ given by a bond. It depends on its c______ and its

purchase price.

dged

rokerage uote

Bid

Offer

ifference

nterest ate

ncome oupon

More about bonds (MK, p.81)• Meaning of T-notes, T-bonds and gilts?Treasury notes, treasury bonds and gilt-edged stock (UK)• Who are market makers?Banks & brokerage companies which quote bid and offer price.• Bid vs. offer price?Bid – the highest price that the buyer is willing to payOffer – the price asked by sellers• What is a spread?Difference between the bid & offer prices (bid/ask or buy/sell)• What is inversely related?Interest rates in the economy & the price of existing bonds.WHY?• What is the yield of a bond and what does it depend on?Income given by a bond. It depends on its coupon and its

purchase price.

Comprehension & vocabulary, MK p 82

1 F

2 T

3 T

4 F

5 T

6 F

7 F

8 F

1 cash flow 2 equity

3 mutual funds 4 pension funds

5 principal 6 maturity

7 coupon 8 insolvent or bankrupt

9 creditors 10 dividends

11 market makers 12 bid / bid price

13 offer / offer price 14 yield

Match up verbs with nouns

borrow money deduct interest payments

finance activities issue shares

issue bonds pay (a rate of) interest

pay a (higher) return pay dividends

pay tax receive interest payments

raise money repay principal sell assets

deduct tax receive dividends repay bonds

repay money sell bonds

The Financing of Corporate Activity, RB p 37Based on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

Match headings with paragraphs

Text headings:• Corporate finance• Stocks vs. Bonds• Bond risks

The Financing of Corporate ActivityBased on: McConnell, C.R., Brue, S.L. (1996). Economics. McGraw-Hill Inc.

Features of well-organized writing:

1. Text headings

2. Topic sentences

3. Paragraphing

4. Connectors

CORPORATE FINANCE• Full text: Generally speaking, ...... three

different ways... First, ..., Second, ..., For example, ...Third,...

• Notes:

THREE WAYS OF CORPORATE FINANCE: 1.2. .... (e.g. ...)3.

CORPORATE FINANCE• Full text: Generally speaking, ...... three

different ways... First, ..., Second, ..., For example, ...Third,...

• Notes: THREE WAYS OF CORPORATE FINANCE:

1. internally, out of undistributed corporate profits

2. borrowing from financial institutions (e.g. a commercial bank, a savings and loan association, an insurance company)

3. issuing common stocks and bonds

STOCKS VS. BONDS• Full text: In contrast, ..., For example, ... This means that...

There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other, ....

• Notes:

STOCKS vs. BONDS

-ownership -lending-less risky: 1.

2.

STOCKS VS. BONDS• Full text: In contrast, ..., For example, ... This means that...

There are clearly important differences between..., First,... Second,..., On the one hand,..., On the other, ....

• Notes:

STOCKS vs. BONDS

-ownership -lending-less risky: 1. legally prior

claim 2. income

“guaranteed”

Bond risks• Full text: clear paragraphing & topic sentences

• Notes:

CORPORATE BOND RISKS

1.

2.

3.

Bond risks• Full text: clear paragraphing & topic sentences

• Notes:

CORPORATE BOND RISKS

1. market value of bonds may fall, selling before maturity may cause you to incur a capital loss

2. price of existing bonds varies inversely with with interest rates in the economy

3. inflation

Introduction to Bonds (video) WATCH: http://www.investopedia.com/video/play/understanding-bonds

• Definition of bonds?• Term used for the price of a bond on the

primary market? • Maturities mentioned?• Coupons mentioned?• Why do corporations/governments issue

bonds?• What is important to remember about bonds?

What is a bond?• A d____ instrument issued by governments,

corporations and other entities in order to finance projects or activities. A l____ that investors make to the bond’s i______.

Term used for the price of a bond on primary market?

• F____ value. What is the face value of a bond?• The amount l_____ to the issuer.What does the investor receive in exchange for

the loan?• Interest, known as c______.

ebt

oanssuers

ent

oupon

ace

What is maturity?• The time when a financial instrument (such as

a bond or an insurance policy) becomes ready to be p_____. Bonds are issued for a specified period of time.

Maturities mentioned?• 1 year, 3 years or 30 yearsCoupons menioned?• 8%Why do corporations/govts. issue bonds?• To fund capital projects / public projects

aid

What is important to remember about bonds?

• The higher the interest rate, the more/less risk it is likely to carry.

• The higher the interest rate, the more risk it is likely to carry.

• HW: MK, p 83 (tasks) – 84 (three ads)

Reading: How to profit from bonds

- read the ads on p 84- answer questions- vocabulary

Intro to stocks?CORPORATE FINANCE, R p 37:

Corporations (PLC’s) finance their activities in ____ different ways. Internally, out of ________ ________ _____ and externally, by _________ from financial institutions such as commercial banks, _______ & ____ ___________ or insurance companies. Finally, corporations can issue ______ & _______.

* štedno kreditna zadruga

three

undistributedcorporate profits borrowing

savings loan associations*

stocks bonds

STOCKS VS. BONDS• A stock is an ________ _____ while a

bond is not. A bond purchaser is ______ money to a corporation.

• The stated value of a bond when it is first issued is its _______________ value.

• The amount lent to the corporation is the ______ and the corporation promises to repay it at a specified future date, also known as the bond’s ______ date.

• The bondholder also receives annual ______ payments.

ownership sharelending

face / par / nominal

principal

maturity

interest

STOCKS VS. BONDS, cont.• Bonds are considered to be less ______ for two

reasons:

1. Dividends can be paid to ___________ only after the interest rates due to bondholders have been paid. This means that bondholders have a _____ _____ _____.

2. If the corporation runs into problems, stockholders may receive no ________ and the value of their stock may ___________________.

Unless the corporation goes bankrupt, bondholders are guaranteed a fixed interest rate and the return of the _______ at _______.

risky

stockholders

legallyprior claim

dividendsplummet / plunge / sink

principal maturity

BOND RISKS – finish the sentences

Corporate bonds are not ....riskless. The market value of bonds... varies over time in accordance with ...the financial health of the corporation.If the corporation falls on hard times and its financial

integrity is shaken....the market value of your bond may....fall. Selling the bond on the bond market prior to...maturity (for less than its...nominal value) will cause...a capital loss.

BOND RISKS, cont.– finish the sentencesMarket prices of bonds are also affected by...changes in interest rates. Increases in interest

rates cause bond prices to ...fall. Decreases in interest rates cause ...bond prices to rise. In other words, the market

value of a bond rises if it pays a ...higher fixed interest rate than the current interest

rate.Bondholders face another element of risk due to...inflation. Substantial inflation will diminish the ...purchasing power of the...principal. You will have lent “dear” dollars, but...will be repaid in “cheap” dollars.

SECURITIES* (part II): BONDS (U16) DEBT FINANCINGDEBT FINANCING ( = ( = loans)

Risk rating: AAA (best) to C (worst)

Companies:

BONDSan interest paying

loan

which can be traded

on bond markets

securities, papers

* vrijednosnice

Governments:

LONG-TERM BONDS:

GILTS – GB

TREASURY BONDS-USA

SHORT-TERM BONDS:

TREASURY BILLS (3-MONTH)

HW: MK 2a, 2b & 2c

Stocks vs. Bonds (video ex.) WATCH:

http://www.investopedia.com/video/play/stocks-versus-bonds

• Stocks and bonds are the two biggest 1… of most 2 … . Stocks usually provide a steady 3…, and bonds tend to ensure a 4…. . Bonds can be bought from 5…, and a careful selection of stocks will include 6… . A combination of stocks and bonds is good for all kinds of investors. For aggressive investors, bonds may 7... the risk of stocks and stabilize the 8… of the market, while stocks can help 9…. investors 10… against the risk of inflation.