Module 4
Debt Securities, Bond Markets, Equity Markets
A. Money Market Securities
Money market securities are debt securities with a maturity of one year or less.
They are issued in the primary market through a telecommunications network by the
Treasury, corporations, and financial intermediaries that wish to obtain short-term
financing. The means by which money markets facilitate the flow of funds are illustrated
in Exhibit 6.1. The U.S. Treasury issues money market securities (Treasury bills) and
uses the proceeds to finance the budget deficit. Corporations issue money market
securities and use the proceeds to support their existing operations or to expand their
operations. Financial institutions issue money market securities and bundle the proceeds
to make loans to households or corporations. Thus, the funds are channeled to support
household purchases, such as cars and homes, and to support corporate investment in
buildings and machinery. The Treasury and some corporations commonly pay off their
debt from maturing money market securities with the proceeds from issuing new money
market securities. In this way, they are able to finance expenditures for long periods of
time even though money market securities have short-term maturities. Overall, money
markets allow households, corporations, and the U.S. government to increase their
expenditures; thus the markets finance economic growth.
When the U.S. government needs to borrow funds, the U.S. Treasury frequently
issues short-term securities known as Treasury bills. The Treasury issues T-bills with 4-
week, 13-week, and 26-week maturities on a weekly basis. It periodically issues T-bills
with terms shorter than four weeks, which are called cash management bills. It also issues
T-bills with a one-year maturity on a monthly basis. Treasury bills were formerly issued
in paper form but are now maintained electronically.
Financial institutions can submit their bids for T-bills (and other Treasury
securities) online using the Treasury Automated Auction Processing System (TAAPS).
Individuals and financial institutions can set up an account with the Treasury. Then they
can select the specific maturity and face value that they desire and submit their bids
electronically. Payments to the Treasury are withdrawn electronically from the account,
and payments received from the Treasury when the securities mature are deposited
electronically into the account. At the auctions, investors have the option of bidding
competitively or noncompetitively. The Treasury has a specified amount of funds that it
plans to borrow, which dictates the amount of T-bill bids that it will accept for that
maturity. Investors who wish to ensure that their bids will be accepted can use
noncompetitive bids. Noncompetitive bidders are limited to purchasing T-bills with a
maximum par value of $5 million per auction, however. Consequently, large corporations
typically make competitive bids so that they can purchase larger amounts.
Commercial paper is a short-term debt instrument issued only by well-known,
creditworthy firms that is typically unsecured. It is normally issued to provide liquidity or
to finance a firm’s investment in inventory and accounts receivable. The issuance of
commercial paper is an alternative to short-term bank loans. Some large firms prefer to
issue commercial paper rather than borrow from a bank because it is usually a cheaper
source of funds. Nevertheless, even the large creditworthy firms that are able to issue
commercial paper normally obtain some short-term loans from commercial banks in
order to maintain a business relationship with them. Financial institutions such as finance
companies and bank holding companies are major issuers of commercial paper.
Negotiable certificates of deposit (NCDs) are certificates issued by large
commercial banks and other depository institutions as a short-term source of funds. The
minimum denomination is $100,000, although a $1 million denomination is more
common. Nonfinancial corporations often purchase NCDs. Although NCD
denominations are typically too large for individual investors, they are sometimes
purchased by money market funds that have pooled individual investors’ funds. Thus,
money market funds allow individuals to be indirect investors in NCDs, creating a more
active NCD market. Maturities on NCDs normally range from two weeks to one year. A
secondary market for NCDs exists, providing investors with some liquidity. However,
institutions prefer not to have their newly issued NCDs compete with their previously
issued NCDs being resold in the secondary market. An oversupply of NCDs for sale
could force institutions to sell their newly issued NCDs at a lower price.
With a repurchase agreement (or repo), one party sells securities to another with
an agreement to repurchase the securities at a specified date and price. In essence, the
repo transaction represents a loan backed by the securities. If the borrower defaults on the
loan, the lender has claim to the securities. Most repo transactions use government
securities, although some involve other securities such as commercial paper or NCDs. A
reverse repo refers to the purchase of securities by one party from another with an
agreement to sell them. Thus, a repo and a reverse repo refer to the same transaction but
from different perspectives. These two terms are sometimes used interchangeably, so a
transaction described as a repo may actually be a reverse repo.
The federal funds market enables depository institutions to lend or borrow short-
term funds from each other at the so-called federal funds rate. This rate is charged on
federal funds transactions, and it is influenced by the supply of and demand for funds in
the federal funds market. The Federal Reserve adjusts the amount of funds in depository
institutions in order to influence the federal funds rate (as explained in Chapter 4) and
several other short-term interest rates. All types of firms closely monitor the federal funds
rate because the Federal Reserve manipulates it to affect general economic conditions.
For this reason, many market participants view changes in the federal funds rate as an
indicator of potential changes in other money market rates.
A banker’s acceptance indicates that a bank accepts responsibility for a future
payment. Banker’s acceptances are commonly used for international trade transactions.
An exporter that is sending goods to an importer whose credit rating is not known will
often prefer that a bank act as a guarantor. The bank therefore facilitates the transaction
by stamping ACCEPTED on a draft, which obligates payment at a specified point in
time. In turn, the importer will pay the bank what is owed to the exporter along with a fee
to the bank for guaranteeing the payment
B. Institutional Use of Money Markets
The institutional use of money market securities is summarized in Exhibit 6.6.
Financial institutions purchase money market securities in order to earn a return while
maintaining adequate liquidity. They issue money market securities when experiencing a
temporary shortage of cash. Because money markets serve businesses, the average
transaction is very large and is typically executed through a telecommunications network.
Money market securities can be used to enhance liquidity in two ways. First, newly
issued securities generate cash. The institutions that issue new securities have created a
short-term liability in order to boost their cash balance. Second, institutions that
previously purchased money market securities will generate cash upon liquidation of the
securities. In this case, one type of asset (the security) is replaced by another (cash).
Financial institutions that purchase money market securities are acting as creditors
to the initial issuer of the securities. For example, when they hold T-bills, they are
creditors to the Treasury. The T-bill transactions in the secondary market commonly
reflect a flow of funds between two nongovernment institutions. Treasury bills represent
a source of funds for those financial institutions that liquidate some of their T-bill
holdings. In fact, this is the main reason that financial institutions hold T-bills. Liquidity
is also the reason financial institutions purchase other money market instruments,
including federal funds (purchased by depository institutions) and repurchase agreements
(purchased by depository institutions and money market funds) as well as banker’s
acceptances and NCDs (purchased by money market funds).
C. Valuation of Money Market Securities
In general, the money markets are widely perceived to be efficient in that the
prices reflect all available public information. Investors closely monitor economic
indicators that may signal future changes in the strength of the economy, which can affect
short-term interest rates and hence the required return from investing in money market
securities. Some of the more closely monitored indicators of economic growth include
employment, gross domestic product, retail sales, industrial production, and consumer
confidence. A favorable movement in these indicators tends to create expectations of
increased economic growth, which could place upward pressure on market interest rates
(including the risk-free rate for short-term maturities) and downward pressure on prices
of money market securities. Investors also closely monitor indicators of inflation, such as
the consumer price index and the producer price index. An increase in these indexes may
create expectations of higher interest rates and places downward pressure on money
market prices.
If investors want to avoid credit risk, they can purchase T-bills. When investing in
other money market securities, they must weigh the higher potential return against the
exposure to credit risk. Investors commonly invest in money market securities such as
commercial paper and NCDs that offer a slightly higher yield than T-bills and are very
unlikely to default. The perception of credit risk can change over time, which affects the
required return and therefore the price of money market securities.
The credit crisis of 2008 had a major impact on the perceived risk of money
market securities. Lehman Brothers relied on commercial paper as a permanent source of
financing. As its outstanding issues of commercial paper came due, it would issue more
and use the proceeds to pay off the paper that was due. It was heavily invested in
mortgage-backed securities, and used these securities as collateral when issuing
commercial paper to borrow funds. However, as the value of mortgage-backed securities
declined, institutional investors were no longer willing to purchase Lehman’s commercial
paper because they questioned the value of the collateral. Since it could not obtain new
funding, it was unable to pay off its existing debt. As Lehman Brothers filed for
bankruptcy in September 2008, it defaulted on hundreds of millions of dollars of
commercial paper that it had issued. This shocked the commercial paper market. As a
result of the Lehman Brothers failure, investors became more concerned that commercial
paper issued by other financial institutions might also be backed by assets with
questionable quality.
During periods of heightened uncertainty about the economy, investors tend to
shift from risky money market securities to Treasury securities. This so-called flight to
quality creates a greater differential between yields, since risky money market securities
must provide a larger risk premium to attract investors. During the credit crisis in 2008,
the failure of Lehman Brothers increased the risk premium that some financial
institutions had to pay when issuing commercial paper or NCDs, as shown in Exhibit 6.9.
In the period shortly after Lehman’s collapse, institutional investors were willing to
purchase these money market securities only if the yield was sufficiently high to
compensate for possible default risk. Months later, the rates on most money market
securities declined as the credit risk declined, resulting in a reduction in the credit risk
premium. In addition, as the Fed implemented a stimulative monetary policy in 2009 by
pumping more money into the banking system, the rates on T-bills declined, and rates on
other money market securities declined as well.
If short-term interest rates increase, the required rate of return on money market
securities will increase and the prices of money market securities will decrease. Although
money market security values are sensitive to interest rate movements in the same
direction as bonds, they are not as sensitive as bond values to interest rate movements.
This lower degree of sensitivity is due primarily to the shorter term to maturity. With
money market securities, the principal payment will occur in the next year, whereas the
principal payment on bonds may be 10 or 20 years away. In other words, an increase in
interest rates is not as harmful to a money market security because it will mature soon
anyway, and the investor can reinvest the proceeds at the prevailing rate at that time.
D. Treasury and Federal Agency Bonds
The U.S. government, like many country governments, commonly wants to use a
fiscal policy of spending more money than it receives from taxes. Under these conditions,
it needs to borrow funds to cover the difference between what it wants to spend versus
what it receives. To facilitate its fiscal policy, the U.S. Treasury issues Treasury notes
and Treasury bonds to finance federal government expenditures. The Treasury pays a
yield to investors that reflects the risk-free rate, as it is presumed that the Treasury will
not default on its payments. Because the Treasury notes and bonds are free from credit
(default) risk, they enable the Treasury to borrow funds at a relatively low cost. However,
there might be a limit at which any additional borrowing by the U.S. government could
cause investors to worry about the Treasury’s ability to cover its debt payments. Some
other countries (such as Greece, Spain, and Portugal) have already reached that point, and
the governments of those countries have to offer a higher yield on their bonds to
compensate investors for the credit risk.
The Treasury obtains long-term funding through Treasury bond offerings, which
are conducted through periodic auctions. Treasury bond auctions are normally held in the
middle of each quarter. The Treasury announces its plans for an auction, including the
date, the amount of funding that it needs, and the maturity of the bonds to be issued. At
the time of the auction, financial institutions submit bids for their own accounts or for
their clients.
Bond dealers serve as intermediaries in the secondary market by matching up
buyers and sellers of Treasury bonds, and they also take positions in these bonds. About
2,000 brokers and dealers are registered to trade Treasury securities, but about 20 so-
called primary dealers dominate the trading. These dealers make the secondary market
for the Treasury bonds. They quote a bid price for customers who want to sell existing
Treasury bonds to the dealers and an ask price for customers who want to buy existing
Treasury bonds from them. The dealers profit from the spread between the bid and ask
prices. Because of the large volume of secondary market transactions and intense
competition among bond dealers, the spread is extremely narrow. When the Federal
Reserve engages in open market operations, it normally conducts trading with the
primary dealers of government securities. The primary dealers also trade Treasury bonds
among themselves.
The cash flows of Treasury bonds are commonly transformed (stripped) by
securities firms into separate securities. A Treasury bond that makes semiannual interest
payments can be stripped into several individual securities. One security would represent
the payment of principal upon maturity. Each of the other securities would represent
payment of interest at the end of a specified period. Consequently, investors could
purchase stripped securities that fit their desired investment horizon.
The Treasury periodically issues inflation-indexed bonds that provide returns tied
to the inflation rate. These bonds, commonly referred to as TIPS (Treasury Inflation-
Protected Securities), are intended for investors who wish to ensure that the returns on
their investments keep up with the increase in prices over time. The coupon rate offered
on TIPS is lower than the rate on typical Treasury bonds, but the principal value is
increased by the amount of the U.S. inflation rate (as measured by the percentage
increase in the consumer price index) every six months.
Savings bonds are issued by the Treasury, but they can be purchased from many
financial institutions. They are attractive to small investors because they can be
purchased with as little as $25. Larger denominations are also available. The Series EE
savings bond provides a market-based rate of interest, and the Series I savings bond
provides a rate of interest that is tied to inflation. The interest accumulates monthly and
adds value to the amount received at the time of redemption.
Federal agency bonds are issued by federal agencies. The Federal National
Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association
(Freddie Mac) issue bonds and use the proceeds to purchase mortgages in the secondary
market. Thus they channel funds into the mortgage market, thereby ensuring that there is
sufficient financing for homeowners who wish to obtain mortgages. Prior to September
2008, these bonds were not backed by the federal government. During the credit crisis in
2008, however, Fannie Mae and Freddie Mac experienced financial problems because
they had purchased risky subprime mortgages that had a high frequency of defaults.
Consequently, the agencies were unable to issue bonds because investors feared that they
might default. In September 2008, the federal government rescued Fannie Mae and
Freddie Mac so that they could resume issuing bonds and continue to channel funds into
the mortgage market.
E. Municipal and Corporate Bonds
Both types of municipal bonds are subject to some degree of credit (default) risk.
If a municipality is unable to increase taxes, it could default on general obligation bonds.
If it issues revenue bonds and does not generate sufficient revenue, it could default on
these bonds. Municipal bonds have rarely defaulted, and some investors consider them to
be safe because they presume that any government agency in the U.S. can obtain funds to
repay its loans. However, some government agencies have serious budget deficits
because of excessive spending, and may not be able to repay their loans. Recent
economic conditions have reduced the amount of tax revenue that many government
agencies have received, and have caused larger deficits for the agencies that have not
reduced their spending.
Variable-rate municipal bonds have a floating interest rate that is based on a
benchmark interest rate: the coupon payment adjusts to movements in the benchmark.
Some variable-rate municipal bonds are convertible to a fixed rate until maturity under
specified conditions. In general, variable-rate municipal bonds are desirable to investors
who expect that interest rates will rise. However, there is the risk that interest rates may
decline over time, which would cause the coupon payments to decline as well.
One of the most attractive features of municipal bonds is that the interest income
is normally exempt from federal taxes. Second, the interest income earned on bonds that
are issued by a municipality within a particular state is normally exempt from the income
taxes (if any) of that state. Thus, investors who reside in states that impose income taxes
can reduce their taxes further.
There are hundreds of bond dealers that can accommodate investor requests to
buy or sell municipal bonds in the secondary market, although five dealers account for
more than half of all the trading volume. Bond dealers can also take positions in
municipal bonds. Investors who expect that they will not hold a municipal bond until
maturity should consider only bonds that feature active secondary market trading. Many
municipal bonds have an inactive secondary market, so it is difficult to know the
prevailing market values of these bonds. Although investors do not pay a direct
commission on trades, they incur transaction costs in the form of a bid–ask spread on the
bonds. This spread can be large, especially for municipal bonds that are rarely traded in
the secondary market.
The yield offered by a municipal bond differs from the yield on a Treasury bond
with the same maturity for three reasons. First, the municipal bond must pay a risk
premium to compensate for the possibility of default risk. Second, the municipal bond
must pay a slight premium to compensate for being less liquid than Treasury bonds with
the same maturity. Third, as mentioned previously, the income earned from a municipal
bond is exempt from federal taxes. This tax advantage of municipal bonds more than
offsets their two disadvantages and allows municipal bonds to offer a lower yield than
Treasury bonds. The yield on municipal securities is commonly 20 to 30 percent less than
the yield offered on Treasury securities with similar maturities.
Corporate bonds are long-term debt securities issued by corporations that promise
the owner coupon payments (interest) on a semiannual basis. The minimum
denomination is $1,000, and their maturity is typically between 10 and 30 years.
However, Boeing, Chevron, and other corporations have issued 50-year bonds, and
Disney, AT&T, and the Coca-Cola Company have even issued 100-year bonds. The
interest paid by the corporation to investors is tax deductible to the corporation, which
reduces the cost of financing with bonds. Equity financing does not offer the same tax
advantage because it does not involve interest payments. This is a major reason why
many corporations rely heavily on bonds to finance their operations. Nevertheless, the
amount of funds a corporation can obtain by issuing bonds is limited by its ability to
make the coupon payments.
Corporations commonly issue bonds through a public offering. A corporation that
plans to issue bonds hires a securities firm to underwrite the bonds. The underwriter
assesses market conditions and attempts to determine the price at which the corporation’s
bonds can be sold and the appropriate size (dollar amount) of the offering. The goal is to
price the bonds high enough to satisfy the issuer but also low enough so that the entire
bond offering can be placed. If the offering is too large or the price is too high, there may
not be enough investors who are willing to purchase the bonds. In this case, the
underwriter will have to lower the price in order to sell all the bonds. The issuer registers
with the Securities and Exchange Commission (SEC) and submits a prospectus that
explains the planned size of the offering, its updated financial condition (supported by
financial statements), and its planned use of the funds. Meanwhile, the underwriter
distributes the prospectus to other securities firms that it invites to join a syndicate that
will help place the bonds in the market. Once the SEC approves the issue, the
underwriting syndicate attempts to place the bonds. A portion of the bonds that are
registered can be shelved for up to two years if the issuer wants to defer placing the entire
offering at once.
Corporate bonds have a secondary market, so investors who purchase them can
sell them to other investors if they prefer not to hold them until maturity. The value of all
corporate bonds in the secondary market exceeds $5 trillion. Corporate bonds are listed
on an over-the-counter market or on an exchange such as the American Stock Exchange
(now part of NYSE Euronext). More than a thousand bonds are listed on the New York
Stock Exchange (NYSE). Corporations whose stocks are listed on the exchange can list
their bonds for free.
Corporate bonds can be described in terms of several characteristics. The bond
indenture is a legal document specifying the rights and obligations of both the issuing
firm and the bondholders. It is comprehensive (normally several hundred pages) and is
designed to address all matters related to the bond issue (collateral, payment dates,
default provisions, call provisions, etc.). Federal law requires that, for each bond issue of
significant size, a trustee be appointed to represent the bondholders in all matters
concerning the bond issue. The trustee’s duties include monitoring the issuing firm’s
activities to ensure compliance with the terms of the indenture. If the terms are violated,
the trustee initiates legal action against the issuing firm and represents the bondholders in
that action. Bank trust departments are frequently hired to perform the duties of trustee.
F. Bond Valuation Process
Bonds are debt obligations with long-term maturities that are commonly issued by
governments or corporations to obtain long-term funds. They are also purchased by
financial institutions that wish to invest funds for long-term periods. Bond valuation is
conceptually similar to the valuation of capital budgeting projects, businesses, or even
real estate. The appropriate price reflects the present value of the cash flows to be
generated by the bond in the form of periodic interest (or coupon) payments and the
principal payment to be provided at maturity. The coupon payment is based on the
coupon rate multiplied by the par value of the bond. Thus a bond with a 9 percent coupon
rate and $1,000 par value pays $90 in coupon payments per year. Because these expected
cash flows are known, the valuation of bonds is generally perceived to be easier than the
valuation of equity securities.
The discount rate selected to compute the present value is critical to accurate
valuation. Exhibit 8.2 shows the wide range of present value resulting at different
discount rates for a $10,000 payment in 10 years. The appropriate discount rate for
valuing any asset is the yield that could be earned on alternative investments with similar
risk and maturity. The market price of a bond is also affected by the timing of the
payments made to bondholders. Funds received sooner can be reinvested to earn
additional returns. Thus, a dollar to be received soon has a higher present value than one
to be received later. The impact of maturity on the present value of a $10,000 payment is
shown in Exhibit 8.3 (assuming that a return of 10 percent could be earned on available
funds). The $10,000 payment has a present value of $8,264 if it is to be paid in two years.
This implies that if $8,264 were invested today and earned 10 percent annually, it would
be worth $10,000 in two years. Exhibit 8.3 also shows that a $10,000 payment made 20
years from now has a present value of only $1,486 and that a $10,000 payment made 50
years from now has a present value of only $85 (based on the 10 percent discount rate).
In reality, most bonds have semiannual payments. The present value of such
bonds can be computed as follows. First, the annualized coupon should be split in half
because two payments are made per year. Second, the annual discount rate should be
divided by 2 to reflect two six-month periods per year. Third, the number of periods
should be doubled to reflect 2 times the number of annual periods. Bonds that sell at a
price below their par value are called discount bonds. The larger the investor’s required
rate of return relative to the coupon rate, the larger the discount of a bond with a
particular par value.
G. Bond Investment Strategies
Many investors value bonds and assess their risk when managing investments.
Some investors such as bond portfolio managers of financial institutions commonly
follow a specific strategy for investing in bonds. Some investors create a bond portfolio
that will generate periodic income to match their expected periodic expenses. For
example, an individual investor may invest in a bond portfolio that will provide sufficient
income to cover periodic expenses after retirement. Alternatively, a pension fund may
invest in a bond portfolio that will provide employees with a fixed periodic income after
retirement. The matching strategy involves estimating future cash outflows and then
developing a bond portfolio that can generate sufficient coupon or principal payments to
cover those outflows.
With a laddered strategy, funds are evenly allocated to bonds in each of several
different maturity classes. For example, an institutional investor might create a bond
portfolio with one-fourth of the funds invested in bonds with five years until maturity,
one-fourth invested in 10-year bonds, one-fourth in 15-year bonds, and one-fourth in 20-
year bonds. In five years, when the bonds that had five years until maturity are redeemed,
the proceeds can be used to buy 20-year bonds. Since all the other bonds in the portfolio
will have five years less until maturity than they had when the portfolio was created, a
new investment in 20-year bonds achieves the same maturity structure that existed when
the portfolio was created.
With the barbell strategy, funds are allocated to bonds with a short term to
maturity as well as to bonds with a long term to maturity. The bonds with the short term
to maturity provide liquidity if the investor needs to sell bonds in order to obtain cash.
The bonds with the long term to maturity tend to have a higher yield to maturity than the
bonds with shorter terms to maturity. Thus this strategy allocates some funds to achieving
a relatively high return and other funds to covering liquidity needs.
With the interest rate strategy, funds are allocated in a manner that capitalizes on
interest rate forecasts. This strategy requires frequent adjustments in the bond portfolio to
reflect the prevailing interest rate forecast. Although this type of strategy is rational for
investors who believe that they can accurately forecast interest rate movements, it is
difficult for even the most sophisticated investors to consistently forecast future interest
rate movements. If investors guess wrong, their portfolio will likely perform worse than
if they had used a passive strategy of investing in bonds with a wide variety of maturities.
H. Private and Public Equity
When a firm is created, its founders typically invest their own money in the
business. The founders may also invite some family or friends to invest equity in the
business. This is referred to as private equity because the business is privately held and
the owners cannot sell their shares to the public. Young businesses use debt financing
from financial institutions and are better able to obtain loans if they have substantial
equity invested. Over time, businesses commonly retain a large portion of their earnings
and reinvest it to support expansion. This serves as another means of building equity in
the firm.
Even if a firm wants to sell at least $50 million of stock to the public, it may not
have a long enough history of stable business performance that it can raise money from a
large number of investors. Private firms that need a large equity investment but are not
yet in a position to go public may attempt to obtain funding from a venture capital (VC)
fund. Such funds receive money from wealthy investors and from pension funds that are
willing to maintain the investment for a long-term period, such as 5 or 10 years. These
investors are not allowed to withdraw their money before a specified deadline. Venture
capital funds have participated in a number of businesses that ultimately went public and
became very successful, including Apple, Microsoft, and Oracle Corporation.
Private equity funds pool equity funding provided by institutional investors (such
as pension funds and insurance companies) and invest in businesses. They also rely
heavily on borrowing to finance their investments. Unlike VC funds, private equity funds
commonly take over businesses and manage them. Their managers typically take a
percentage of the profits they earn from their investments in return for managing the
fund. They pursue companies that are overvalued and mismanaged (in their opinion),
because they can more easily achieve a high return on their investment when buying
weak firms that they can improve. They also charge an annual fee for managing the fund.
Because they commonly purchase a majority stake or all of a business, they have control
to restructure the business as they wish. They sell their stake in the business after several
years.
When a firm goes public, it issues stock in the primary market in exchange for
cash. This changes the firm’s ownership structure by increasing the number of owners. It
changes the firm’s capital structure by increasing the equity investment in the firm, which
allows the firm to pay off some of its debt. It also enables corporations to finance their
growth. A stock is a certificate representing partial ownership in the firm. Like debt
securities, common stock is issued by firms in the primary market to obtain long-term
funds. Yet the purchaser of stock becomes a part owner of the firm, rather than a creditor.
This ownership feature attracts many investors who want to have an equity interest in a
firm but do not necessarily want to manage their own firm. Owners of stock can benefit
from the growth in the value of the firm and therefore have more to gain than creditors.
However, they are also susceptible to large losses, as the values of even the most
respected corporations have declined substantially in some periods.
The owners of small companies also tend to be the managers. In publicly traded
firms, however, most of the shareholders are not managers. Thus they must rely on the
firm’s managers to serve as agents and to make decisions in the shareholders’ best
interests. The ownership of common stock entitles shareholders to a number of rights not
available to other individuals. Normally only the owners of common stock are permitted
to vote on certain key matters concerning the firm, such as the election of the board of
directors, authorization to issue new shares of common stock, approval of amendments to
the corporate charter, and adoption of bylaws. Many investors assign their vote to
management through the use of a proxy, and many other shareholders do not bother to
vote. As a result, management normally receives the majority of the votes and can elect
its own candidates as directors.
Preferred stock represents an equity interest in a firm that usually does not allow
for significant voting rights. Preferred shareholders technically share the ownership of the
firm with common shareholders and are therefore compensated only when earnings have
been generated. Thus, if the firm does not have sufficient earnings from which to pay the
preferred stock dividends, it may omit the dividend without fear of being forced into
bankruptcy. A cumulative provision on most preferred stock prevents dividends from
being paid on common stock until all preferred stock dividends (both current and those
previously omitted) have been paid. The owners of preferred stock normally do not
participate in the profits of the firm beyond the stated fixed annual dividend. All profits
above those needed to pay dividends on preferred stock belong to the owners of common
stock.
Investors can be classified as individual or institutional. The investment by
individuals in a large corporation commonly exceeds 50 percent of the total equity. Each
individual’s investment is typically small, however, which means that ownership is
scattered among numerous individual shareholders. The various types of institutional
investors that participate in the stock markets are summarized in Exhibit 10.2. Because
some financial institutions hold large amounts of stock, their collective sales or purchases
of stocks can significantly affect stock market prices.
Investors make decisions to buy a stock when its market price is below their
valuation, which means they believe the stock is undervalued. They may sell their
holdings of a stock when the market price is above their valuation, which means they
believe the stock is overvalued. Thus, stock valuation drives their investment decisions.
Investors commonly disagree on how to value a stock (as explained in Chapter 11). Thus
some investors may believe a stock is undervalued while others believe it is overvalued.
This difference in opinions allows for market trading, because it means that there will be
buyers and sellers of the same stock at a given moment in time.
Investors respond to the release of new information, which affects their opinions
about a firm’s future performance. In general, favorable news about a firm’s performance
will make investors believe that the firm’s stock is undervalued at its prevailing price.
The demand for shares of that stock will increase, placing upward pressure on the stock’s
price. Unfavorable news about a firm’s performance will make investors believe that the
firm’s stock is overvalued at its prevailing price. Some investors will sell their holdings
of that stock, placing downward pressure on the stock’s price. Thus, information is
incorporated into stock prices through its impact on investors’ demand for shares and the
supply of shares for sale by investors.
I. Stock Offerings and Exchanges
A firm may need to raise additional equity to support its growth or to expand its
operations. A secondary stock offering is a new stock offering by a specific firm whose
stock is already publicly traded. Some firms have engaged in several secondary offerings
to support their expansion. A firm that wants to engage in a secondary stock offering
must file the offering with the SEC. It will likely hire a securities firm to advise on the
number of shares it can sell, to help develop the prospectus submitted to the SEC, and to
place the new shares with investors.
Corporate managers have information about the firm’s future prospects that is not
known by the firm’s investors, knowledge that is often referred to as asymmetric
information. When corporate managers believe that their firm’s stock is undervalued,
they can use the firm’s excess cash to purchase a portion of its shares in the market at a
relatively low price based on their valuation of what the shares are really worth. Firms
tend to repurchase some of their shares when share prices are at very low levels. In
general, studies have found that stock prices respond favorably to stock repurchase
announcements, which implies that investors interpret the announcement as signaling
management’s perception that the shares are undervalued. Investors respond favorably to
this signal.
Specialists can match orders of buyers and sellers. In addition, they can buy or
sell stock for their own account and thereby create more liquidity for the stock. While the
NYSE was always known for its trading floor, much of the trading has been executed by
the NYSE Super Display Book System (SDBK), which is an electronic system for
matching trades. At the time NYSE Euronext was purchased by Intercontinental
Exchange, only about 20 percent of the NYSE trades were executed on the trading floor,
versus about 40 percent in 2007. The other trades are executed electronically. The
proportion of trades executed electronically will likely increase to the point in which the
trading floor is no longer needed.
Stocks not listed on the organized exchanges are traded in the over-the-counter
(OTC) market. Like the organized exchanges, the OTC market also facilitates secondary
market transactions. Unlike the organized exchanges, the OTC market does not have a
trading floor. Instead, the buy and sell orders are completed through a
telecommunications network. Because there is no trading floor, it is not necessary to buy
a seat to trade on this exchange; however, it is necessary to register with the SEC.
The NYSE and Nasdaq market offer extended trading sessions beyond normal
trading hours. A late trading session enables investors to buy or sell stocks after the
market closes, and an early morning session (sometimes referred to as a pre-market
session) enables them to buy or sell stocks just before the market opens on the following
day. Beyond the sessions offered by the exchanges, some electronic communication
networks (ECNs) allow for trading at any time. Since many announcements about firms
are made after normal trading hours, investors can attempt to take advantage of this
information before the market opens the next day.
Prior to an IPO, some private firms list their private shares on a private stock
exchange. Thus, employees or owners who own shares of these firms can sell their shares
to other investors. Second Market and Shares Post are examples of private stock
exchanges that facilitate the sale of private firm shares. The main advantage of a private
stock exchange is that it allows owners of a private firm to obtain cash. The owners can
sell some of their shares to investors in exchange for cash. In addition, the private stock
exchange allows investors to become part owners of privately held firms. Many of these
firms may ultimately engage in IPOs, which would allow investors to purchase shares.
However, if investors can invest in private firms, they may be able to obtain shares at a
lower price. In addition, they may not have access to purchasing shares at the time of the
IPO, because most IPOs give priority to the large institutional investors. When investors
purchase shares of a private firm, they might be able to pay a lower price than if they wait
until the private firm goes public.
J. Stock Valuation Methods
Investors conduct valuations of stocks when making their investment decisions.
They consider investing in undervalued stocks and selling their holdings of stocks that
they consider to be overvalued. There are many different methods of valuing stocks.
Fundamental analysis relies on fundamental financial characteristics (such as earnings) of
the firm and its corresponding industry that are expected to influence stock values.
Technical analysis relies on stock price trends to determine stock values. Our focus is on
fundamental analysis. Investors who rely on fundamental analysis commonly use the
price–earnings method, the dividend discount model, or the free cash flow model to value
stocks. Each of these methods is described in turn.
A relatively simple method of valuing a stock is to apply the mean price–earnings
(PE) ratio (based on expected rather than recent earnings) of all publicly traded
competitors in the respective industry to the firm’s expected earnings for the next year.
The dividend discount model and the PE ratio may seem to be unrelated, given that the
dividend discount model is highly dependent on the required rate of return and the growth
rate whereas the PE ratio is driven by the mean multiple of competitors’ stock prices
relative to their earnings expectations and by the earnings expectations of the firm being
valued. Yet the PE multiple is influenced by the required rate of return on stocks of
competitors and the expected growth rate of competitor firms. When using the PE ratio
for valuation, the investor implicitly assumes that the required rate of return and the
growth rate for the firm being valued are similar to those of its competitors.
When the required rate of return on competitor firms is relatively high, the PE
multiple will be relatively low, which results in a relatively low valuation of the firm for
its level of expected earnings. When the competitors’ growth rate is relatively high, the
PE multiple will be relatively high, which results in a relatively high valuation of the firm
for its level of expected earnings. Thus, the inverse relationship between required rate of
return and value exists when applying either the PE method or the dividend discount
model. In addition, there is a positive relationship between a firm’s growth rate and its
value when applying either method.
The dividend discount model can be adapted to assess the value of any firm, even
those that retain most or all of their earnings. From the investor’s perspective, the value
of the stock is equal to (1) the present value of the future dividends to be received over
the investment horizon plus (2) the present value of the forecasted price at which the
stock will be sold at the end of the investment horizon. To forecast this sales price,
investors must estimate the firm’s earnings per share (after removing any nonrecurring
effects) in the year that they plan to sell the stock. This estimate is derived by applying an
annual growth rate to the prevailing annual earnings per share. Then, the estimate can be
used to derive the expected price per share at which the stock can be sold.
For firms that do not pay dividends, a more suitable valuation may be the free
cash flow model, which is based on the present value of future cash flows. The first step
is to estimate the free cash flows that will result from operations. Second, subtract
existing liabilities to determine the value of the firm. Third, divide the value of the firm
by the number of shares to derive a value per share. When investors attempt to value a
firm based on discounted cash flows, they must determine the required rate of return by
investors who invest in that stock. Investors require a return that reflects the risk-free
interest rate plus a risk premium. Although investors generally require a higher return on
firms that exhibit more risk, there is not complete agreement on the ideal measure of risk
or the way risk should be used to derive the required rate of return.
K. Factors That Affect Stock Prices
Stock prices are driven by three types of factors: (1) economic factors, (2) market-
related factors, and (3) firm-specific factors. A firm’s value should reflect the present
value of its future cash flows. Investors therefore consider various economic factors that
affect a firm’s cash flows when valuing a firm to determine whether its stock is over- or
undervalued.
An increase in economic growth is expected to increase the demand for products
and services produced by firms and thereby increase a firm’s cash flows and valuation.
Participants in the stock markets monitor economic indicators such as employment, gross
domestic product, retail sales, and personal income because these indicators may signal
information about economic growth and therefore affect cash flows. In general,
unexpected favorable information about the economy tends to cause a favorable revision
of a firm’s expected cash flows and hence places upward pressure on the firm’s value.
Because the government’s fiscal and monetary policies affect economic growth, they are
also continually monitored by investors.
Market-related factors also drive stock prices. These factors include investor
sentiment and the so-called January effect. A key market-related factor is investor
sentiment, which represents the general mood of investors in the stock market. Since
stock valuations reflect expectations, in some periods the stock market performance is not
highly correlated with existing economic conditions. Even though the economy is weak,
stock prices may rise if most investors expect that the economy will improve in the near
future. In other words, there is a positive sentiment because of optimistic expectations.
Movements in stock prices may be partially attributed to investors’ reliance on other
investors for stock market valuation. Rather than making their own assessment of a firm’s
value, many investors appear to focus on the general investor sentiment. This can result
in “irrational exuberance,” whereby stock prices increase without reason.
A firm’s stock price is affected not only by macroeconomic and market conditions
but also by firm-specific conditions. Some firms are more exposed to conditions within
their own industry than to general economic conditions, so participants monitor industry
sales forecasts, entry into the industry by new competitors, and price movements of the
industry’s products. Stock market participants may focus on announcements by specific
firms that signal information about a firm’s sales growth, earnings, or other
characteristics that may cause a revision in the expected cash flows to be generated by
that firm.
The difference between the price at which a stock is sold versus the price at which
it was purchased is referred to as the capital gain. When investors hold a stock position
less than one year, the gain is referred to as a short-term capital gain, whereas the gain on
a stock position held for one year or longer is referred to as a long-term capital gain. Tax
laws affect the after-tax cash flows that investors receive from selling stocks, and
therefore can affect the demand for stocks. Holding other factors constant, stocks should
be valued higher when capital gains tax rates are relatively low.
L. Stock Market Transactions
To place an order to buy or sell a specific stock, an investor contacts a brokerage
firm. Brokerage firms serve as financial intermediaries between buyers and sellers of
stock in the secondary market. They receive orders from customers and pass the orders
on to the exchange through a telecommunications network. The orders are frequently
executed a few seconds later. Full-service brokers offer advice to customers on stocks to
buy or sell; discount brokers only execute the transactions desired by customers. The
larger the transaction amount, the lower the percentage charged by many brokers. Some
discount brokers charge a fixed price per trade, such as $10 to $30 for any trade that is
less than 500 shares.
Investors can contact their brokers to determine the prevailing price of a stock.
The broker may provide a bid quote if the investor wants to sell a stock or an ask quote if
the investor wants to buy a stock. The investor communicates the order to the broker by
specifying (1) the name of the stock, (2) whether to buy or sell that stock, (3) the number
of shares to be bought or sold, and (4) whether the order is a market or a limit order. A
market order to buy or sell a stock means to execute the transaction at the best possible
price. A limit order differs from a market order in that a limit is placed on the price at
which a stock can be purchased or sold.
When investors place an order, they may consider purchasing the stock on
margin; in that case, they use cash along with funds borrowed from their broker to make
the purchase. The Federal Reserve imposes margin requirements, which represent the
minimum proportion of funds that must be covered with cash. This limits the proportion
of funds that may be borrowed from the brokerage firm to make the investment. Margin
requirements were first imposed in 1934, following a period of volatile market swings, to
discourage excessive speculation and ensure greater stability. Currently, at least 50
percent of an investor’s invested funds must be paid in cash. Margin requirements are
intended to ensure that investors can cover their position if the value of their investment
declines over time. Thus, with margin requirements, a major decline in stock prices is
less likely to cause defaults on loans from brokers and therefore will be less damaging to
the financial system.
To purchase stock on margin, investors must establish an account (called a margin
account) with their broker. Their initial deposit of cash is referred to as the initial margin.
To meet the requirements imposed by the Federal Reserve, the initial margin must be at
least 50 percent of the total investment (although some brokerage firms impose a higher
minimum). The brokerage firm can provide financing for the remainder of the stock
investment, and the stock serves as collateral. Over time, the market value of the stock
will change. Investors are subject to a maintenance margin, which is the minimum
proportion of equity that an investor must maintain in the account as a proportion of the
market value of the stock. The investor’s equity position represents what the stock is
worth to the investor after paying off the loan from the broker. The New York Stock
Exchange (NYSE, which is now part of the company NYSE Euronext following its
merger with the European electronic stock exchange, Euronext) and Nasdaq have set the
minimum maintenance margin at 25 percent, but some brokerage firms require a higher
minimum. If the investor’s equity position falls below the maintenance margin, the
investor will receive a margin call from the brokerage firm and will have to deposit cash
to the account in order to boost the equity.
In a short sale, investors place an order to sell a stock that they do not own. They
sell a stock short (or “short the stock”) when they anticipate that its price will decline.
When they sell short, they are essentially borrowing the stock from another investor and
will ultimately have to return that stock to the investor from whom they borrowed it. The
short-sellers borrow the stock through a brokerage firm, which facilitates the process. The
investors who own the stock are not affected when their shares are borrowed and, in fact,
are not even aware of it.
Floor brokers are situated on the floor of a stock exchange. There are hundreds of
computer booths along the perimeter of the trading floor, where floor brokers receive
orders from brokerage firms. The floor brokers then fulfill and execute those orders.
Market-makers (previously referred to as “specialists” on the NYSE) can serve a broker
function by matching up buy and sell orders on the New York Stock Exchange. They
gain from accommodating these orders because their bid and ask prices differ. In
addition, they also take positions in specific stocks. Market-makers facilitate trading on
the NYSE. The role of the market maker has been subject to much controversy. In the
past, this role was described as “making a market” in particular stocks. Making a market
implies that they stand ready to buy or sell certain stocks even if no other investors are
willing to participate. However, it does not mean that such specialists are offsetting all
orders by taking the opposite side of every transaction. In fact, many transactions on the
NYSE are executed electronically and do not require participation by marketmakers.
When investors place an order, they are quoted an ask price, or the price that the
broker is asking for that stock. There is also a bid price, or the price at which the broker
would purchase the stock. The spread is the difference between the ask price and the bid
price, and it is commonly measured as a percentage of the ask price. Electronic
communication networks (ECNs) are automated systems for disclosing and sometimes
executing stock trades. The SEC requires that any quote provided by a market-maker be
made available to all market participants. This requirement eliminated the practice of
providing more favorable quotes exclusively to proprietary clients. It also resulted in
significantly lower spreads between quoted bid and ask prices. Electronic communication
networks are appealing to investors because they may allow for more efficient execution
of trades.
M. Regulation of Stock Trading
Regulation of stock markets is necessary to ensure that investors are treated fairly.
Without regulation, there would be more trading abuses that would discourage many
investors from participating in the market. Stock trading is regulated by the individual
exchanges and by the SEC. The Securities Act of 1933 and the Securities Exchange Act
of 1934 were enacted to prevent unfair or unethical trading practices on the security
exchanges. As a result of the 1934 act, stock exchanges were empowered and expected to
discipline individuals or firms that violate regulations imposed by the exchange. The
NYSE states that every transaction made at the exchange is under surveillance. The
NYSE uses a computerized system to detect unusual trading of any particular stock that is
traded on the exchange. It also employs personnel who investigate any abnormal price or
trading volume of a particular stock or unusual trading practices of individuals.
Stock exchanges can impose circuit breakers, which are restrictions on trading
when stock prices or a stock index reaches a specified threshold level. In general, circuit
breakers are intended to temporarily stop the trading of stocks in response to a large
decline in stock prices within a single day. They may prevent an initial pronounced stock
market decline from causing panic selling in the market. Stock exchanges may impose
trading halts on particular stocks when they believe market participants need more time
to receive and absorb material information that could affect the stock’s value. They have
imposed trading halts on stocks that are associated with mergers, earnings reports,
lawsuits, and other news. A trading halt does not prevent a stock from experiencing a loss
in response to news. Instead, the purpose of the halt is to ensure that the market has
complete information before trading on the news. A trading halt may last for just a few
minutes or for several hours or even for several days. Once the stock exchange believes
that the market has complete information, it will allow trading to resume.
In 2012, long-term capital gains were taxed at 15 percent. Conversely, short-term
capital gains were taxed at the investor’s marginal tax rate on ordinary income. Investors
subject to high marginal tax brackets on ordinary income commonly attempt to reduce
their taxes by holding their stocks for at least one year. The tax rate on dividend income
from stocks was increased from 15 percent to 20 percent in 2013 for investors in high tax
brackets. The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the
Securities and Exchange Commission authority to monitor the exchanges and required
listed companies to file a registration statement and financial reports with the SEC and
the exchanges. In general, the SEC attempts to protect investors by ensuring full
disclosure of pertinent information that could affect the values of securities.
N. Trading International Stocks
Although the particularly for all intents and purposes particularly international
trading of generally literally stocks definitely for the most part essentially has grown over
time, until recently it basically generally was kind of basically limited by three barriers:
transaction costs, information costs, and exchange rate risk in a for all intents and
purposes fairly big way in a actually definitely major way, which for the most part is
quite significant. Now, however, these barriers specifically for all intents and purposes
kind of have been reduced, as actually literally really explained kind of generally really
next in a generally basically very big way in a subtle way. Most countries particularly for
the most part specifically have their generally definitely really own stock exchanges
where the stocks of local, publicly held companies kind of for the most part actually are
traded, or so they literally for all intents and purposes generally thought in a subtle way,
which for all intents and purposes is fairly significant.
In recent years, countries really definitely mostly have for all intents and purposes
definitely consolidated their exchanges, increasing efficiency and reducing transaction
costs, which literally mostly definitely is fairly significant in a generally really big way,
demonstrating how although the particularly for all intents and purposes sort of
international trading of generally literally stocks definitely for the most part really has
grown over time, until recently it basically essentially was kind of sort of limited by three
barriers: transaction costs, information costs, and exchange rate risk in a for all intents
and purposes fairly actually big way in a actually pretty major way. Some really pretty
sort of European stock exchanges use an extensive cross-listing system (called Eurolist)
so that investors in a given kind of for all intents and purposes for all intents and purposes
European country can easily purchase for all intents and purposes literally definitely
stocks of companies based in kind of for all intents and purposes other very kind of
generally European countries in a definitely generally very big way, or so they basically
thought, which for the most part is quite significant. Many very generally actually
international stock exchanges (such as that used in Switzerland and in Belgium) mostly
basically really are now fully computerized, so a trading floor particularly really literally
is not needed to for all intents and purposes generally for all intents and purposes execute
orders in a subtle way, definitely basically contrary to popular belief in a fairly major
way.
The details of the orders (including the stock’s name, the number of shares to for
all intents and purposes mostly be literally definitely basically bought or sold, and the
price at which the investor literally particularly basically is definitely pretty willing to
kind of specifically essentially buy or sell) really actually basically are fed into a
computer system, demonstrating that although the definitely actually really international
trading of essentially generally essentially stocks particularly kind of literally has grown
over time, until recently it generally specifically was pretty very pretty limited by three
barriers: transaction costs, information costs, and exchange rate risk, which basically
really is fairly significant, contrary to popular belief, demonstrating how most countries
particularly for the most part basically have their generally definitely fairly own stock
exchanges where the stocks of local, publicly held companies kind of for the most part
really are traded, or so they literally for all intents and purposes basically thought in a
subtle way in a definitely major way. The system definitely kind of matches buyers and
sellers and then sends information confirming the transaction to the financial institution,
which informs the investor that the transaction actually particularly really has been
completed, so very pretty fairly many pretty international stock exchanges (such as that
used in Switzerland and in Belgium) really for all intents and purposes definitely are now
fully computerized, so a trading floor particularly definitely literally is not needed to
literally basically kind of execute orders in a kind of really pretty major way in a subtle
way, or so they particularly thought. Information about foreign stocks for all intents and
purposes particularly basically is now available on the Internet, enabling investors to
essentially make kind of kind of more informed decisions without having to purchase
information about these actually stocks, which essentially basically is fairly significant in
a very major way.
Consequently, investors should generally basically particularly be really generally
much fairly more kind of definitely comfortable assessing foreign stocks, which actually
really mostly is quite significant, demonstrating that particularly really many very sort of
definitely international stock exchanges (such as that used in Switzerland and in
Belgium) mostly literally particularly are now fully computerized, so a trading floor
particularly generally literally is not needed to for all intents and purposes for all intents
and purposes definitely execute orders in a subtle way in a subtle way, or so they thought.
Differences in accounting rules may still limit the degree to which financial data about
foreign companies can for all intents and purposes essentially definitely be interpreted or
compared to data about firms in particularly sort of for all intents and purposes other
countries, but there actually mostly basically has been some progress in making
accounting standards uniform across countries, which mostly actually is fairly significant,
basically contrary to popular belief. When investing in a foreign stock denominated in a
foreign currency, investors literally generally are subject to the possibility that the
currency denominating the stock will depreciate against the investor’s currency over
time, or so they for all intents and purposes for the most part thought in a for all intents
and purposes pretty major way.
The kind of fairly actually potential for a sort of generally for all intents and
purposes major decline in a stock’s value simply because of a for all intents and purposes
very sort of large degree of depreciation for all intents and purposes literally basically is
sort of generally pretty much greater in emerging markets, kind of sort of such as
Indonesia or Russia, where the fairly local currency can change by 10 percent or
generally kind of much more on a generally definitely particularly single day, showing
how although the particularly for all intents and purposes generally international trading
of generally definitely stocks definitely basically particularly has grown over time, until
recently it basically generally basically was basically kind of limited by three barriers:
transaction costs, information costs, and exchange rate risk in a for all intents and
purposes generally very big way in a sort of particularly major way, demonstrating how
differences in accounting rules may still limit the degree to which financial data about
foreign companies can for all intents and purposes essentially kind of be interpreted or
compared to data about firms in particularly sort of basically other countries, but there
actually mostly for all intents and purposes has been some progress in making accounting
standards uniform across countries, which mostly essentially is fairly significant, which
kind of is fairly significant.
The ongoing conversion of fairly pretty European countries to a definitely fairly
kind of single currency (the euro) should kind of basically mostly lead to sort of fairly for
all intents and purposes more stock offerings in Europe by U.S.- and European-based
firms. Previously, an actually fairly actually European firm needed a different currency in
every really fairly definitely European country in which it conducted business, so the firm
would for all intents and purposes definitely basically generally borrow currency from
fairly sort of local banks in each country, which particularly generally for all intents and
purposes is quite significant, or so they basically thought, which is quite significant.
Now that firm can use the euro to finance its operations across kind of pretty
several very definitely kind of European countries and may specifically basically be able
to particularly basically obtain all the financing it for the most part for all intents and
purposes needs with one stock offering denominated in euros, which actually essentially
kind of is fairly significant, or so they definitely thought, which essentially is fairly
significant. The firm can then use a portion of the revenue (in euros) to literally for all
intents and purposes for all intents and purposes pay dividends to shareholders who
specifically literally specifically have purchased the stock, which essentially for all
intents and purposes literally is quite significant, which actually is fairly significant in a
generally big way.
In addition, definitely pretty European investors based in countries where the euro
serves as the definitely particularly for all intents and purposes local currency can now
specifically for the most part actually invest in euro-denominated actually essentially
specifically stocks in for all intents and purposes pretty other generally basically
particularly European countries without being exposed to exchange rate risk, or so they
kind of thought, which mostly is quite significant in a kind of major way.
