Investment banking is a field of banking that aids companies in acquiring funds.

In addition to the acquisition of new

funds, investment banking also offers advice for a wide range of transactions a company might engage in.

Banks either engaged in commercial banking or investment banking. In commercial banking, the institution collects
deposits from clients and gives direct loans to businesses and individuals. In the United States, it was illegal for a
bank to have both commercial and investment banking until 1999, when the Gramm-Leach-Bliley Act legalized it.

Through investment banking, an institution generates funds in two different ways. They may draw on public funds
through the capital market by selling stock in their company, and they may also seek out venture capital or private
equity in exchange for a stake in their company.

An investment-banking firm also does a large amount of consulting. Investment bankers give companies advice on
mergers and acquisitions, for example. They also track the market in order to give advice on when to make public
offerings and how best to manage the business' public assets. Some of the consultative activities investment banking
firms engage in overlap with those of a private brokerage, as they will often give buy-and-sell advice to the companies
they represent.

The line between investment banking and other forms of banking has blurred in recent years, as deregulation allows
banking institutions to take on more and more sectors. With the advent of mega-banks which operate at a number of
levels, many of the services often associated with investment banking are being made available to clients who would
otherwise be too small to make their business profitable.

Careers in investment banking are lucrative and one of the most sought after positions in the money-market world. A
career in investment banking involves extensive traveling, grueling hours and an often cut-throat lifestyle. While highly
competitive and time intensive, investment banking also offers an exciting lifestyle with huge financial incentives that
are a draw to many people.

Merchant banking
Structuring
Investment Bank

Methods to Calculate Discount Rates - DCF

Discounted Cash Flow Analysis can be broken down into three sections:

1. Forecast free cash flows for a given period (5 to 10 years generally, and
depending on the industry)
2. Discount free cash flows using some discount rate
3. Calculate the Net Present Value

A question you will probably encounter during interviews will be: What discount
rate should you use when performing a DCF?

According to Wet Feet, you should know 4 different discounting methods: CAPM
Model, WACC, Gorden Model, Hurdle Rate or Rule of Thumb.

1. CAPM Model - Calculating the return on equity (Re)

--- Re = Rf + Beta (Rm - Rf)
--- Beta is a measure of how sensitive the equity price is to the market (also
known as market risk)
--- (Rm - Rf) is known as the risk premium (generally 5%-9% depending on your
source information)

2. WACC (Weighted Average Cost of Capital)

 --- WACC = Re*E / (D + E) + Rd (1 - Tc ) *D / (D + E)
--- Re = return on equity
--- Rd = return on debt
--- E = market value of the equity
--- D = market value of debt (usually assume equal to BV
--- Tc = corporate tax tate

3. Gordon Model
--- Re = D1/P0 + g
--- D1 = next years' expected dividend
--- P0 = today's stock price
--- g = the expected growth rate of dividends
--- this model assumes a constant dividend payout ration and dividend growth
into perpetuity

4. Hurdle Rate or Rule of Thumb

--- Determine some rate of return - say 12% - and only accept investment
projects or opportunities that exceed that rate

Commercial bank: A commercial bank, also known as a business bank, takes deposits and
gives loans, mostly to corporations. After the Great Depression, Congress required that
commercial and investment banks be separate with the Glass-Steagall Act; that restriction no
longer applies today. Bank of America is currently the largest commercial bank in the United
States.

Investment bank: An investment bank raises money by selling securities to companies and to
the government. They also provide advice to corporations about mergers and buyouts. With
Lehman Bros. and Merrill Lynch out of the picture, Goldman Sachs and Morgan Stanley are
the two largest investment banks in the United States.

Retail bank: A retail bank deals directly with consumers instead of companies or other banks.
(The latter business is conducted by a commercial bank.) A retail bank primarily handles
savings and checking accounts, mortgages, and personal loans.

Universal bank: A universal bank participates in the banking activities of a commercial bank
and an investment bank. Bank of America is a universal bank—in addition to being the
leading commercial bank, it is also an investment bank.

Other Financial Institutions

Savings-and-loan association or thrift: A savings-and-loan association primarily accepts

deposits from consumers and makes mortgage loans. During the savings-and-loan crisis of
the late 1980s and early 1990s, the number of such associations declined by 50 percent
after the housing market experienced a downturn.

Clearing house: A clearing house is a private company or a part of a bank that helps settle
transactions. For example, it might ensure that a checking account has sufficient funds for a
certain debit card transaction before the money goes through. LCH.Clearnet, Europe's
largest clearing house, declared Lehman Bros. in default and suspended the bank from
operating in the London market.

Brokerage firm, securities firm: A brokerage firm acts as a mediator between a buyer and
seller of stocks or securities. When someone wants to buy something in the stock market,
they usually go through a brokerage firm, such as Wachovia Securities. While brokerage
firms aren't insured under any federal agency, they can register to be insured under the
Securities Investor Protection Corp., which was created by Congress in 1970.