Asset and Liability Management
FI 201
Investment Banking
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The Role of Investment Bankers
- Middleman who brings together investors and firms (and governments) issuing new securities.
- Initial Public Offering (IPO) – First sale of common stock to the general public.
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The Role of Investment Bankers
- Underwriting – Purchase of an issue of new securities for subsequent sale by investment bankers; the guaranteeing of the sale of a new issue of securities.
- Originating House – Investment banker who makes an agreement to sell a new issue and forms a syndicate to sell securities.
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The Role of Investment Bankers
- Syndicate – Selling group formed to market a new issue of securities
- Best efforts agreement – Contract with an investment banker for the sale of securities in which the investment banker does not guarantee the sale but does agree to make the best effort to sell the securities
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- The pricing of new issues is crucial.
- If the initial offer price is too high, the syndicate will be unable sell the securities.
- When this occurs the investment banker has two choices:
1) to maintain the offer price and to hold the
securities in inventory until they are sold, or
2) to let the market find a lower price level that
will induce investors to purchase the
securities.
- Neither choice benefits the investment bankers
Pricing a New Issue
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Marketing New Securities
- Preliminary prospectus (red herring) – Initial document detailing the financial condition of a firm that must be filed with the SEC to register a new issue of securities.
- Securities Exchange Commission (SEC) – Government agency that enforces the federal securities laws.
- Registration – The process of filing information with the SEC concerning a proposed sale of securities to the general public.
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- A nonpublic sale of securities to a financial institution such as an endowment fund, mutual fund or pension fund.
Private Placements
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Regulation- Full Disclosure Laws
Securities Act of 1933 – covers new issue of securities
Securities Exchange Act of 1934 – devoted to trading in existing securities
10-K Report – Required annual report filed with the SEC by publicly-held firms.
Securities Investor Protection Corporation (SIPC) – Federal agency that insures investors against failures by brokerage firms – limited to $500,000 per customer.
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- The independence of auditors and the creation of the Public Company Accounting Oversight Board
- Corporate responsibility and financial disclosure
- Conflict of interest and corporate fraud and accountability
Sarbanes-Oxley Act of 2002
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