a.

Public Offering of Securities

Investment banks do the following:

What To Whom Why

To consolidate funds for the
Guide enterprise to offer company to use in
General public
securities achieving their business
objectives
Give suggestions on the
issuing company on what To allow fluent flow of
Potential investors
kind of securities seem to be funds
fetching

Investment banks have the ability to attain information about the level of

willingness do the potential investors have in buying financial securities and on what

price they are willing to outlay or settle.

They participate in initial public offering (first time that a corporation offers stock

to the general public.) and subsequent public offering (secondary or seasoned offering).

Issuing company will select a specific investment banks that will underwrite (to

agree to purchase such as security issue usually on a fixed date at a fixed price with

a view to public distribution) its offered securities, then the investment banks perform

and observe due diligence to evaluate closely the accurate value of the enterprise.

to look and evaluate

issuing investment the value of the documented
company banks enterprise with due via prospectus
diligence
Prospectus

 document required by the Securities and Exchange Commission in public

offerings

 result of the due diligence manifested by the investments banks

 has all the necessary information considered relevant that will help the potential

investors decide whether to buy or not.

 manifests company’s profitability, net worth, and risks (pending lawsuits and

competition)

Preliminary Prospectus

 shared to potential investors

 known as red herring (notice printed in red in front cover that’s why tentative

in nature)

 tentative in nature

After the SEC gave approval on the pending prospectus, the investment banks

start to find institutional investors and offer them the securities which are available in the

market. In return, these investors check the prospectus and securities offered thoroughly

so they can make a sound decision. While looking for prospective investors, company

officials observe a quiet time for a certain duration.

approved pending investment banks investors run

prospectus/ visit institutional through the Quiet
prospectus and
registration investors (pension securities time
statement and mutual funds) offered
Quiet time

 duration of time where company officials were restricted to say about the entity

 given so the potential investors has a uniform information that will not give them

an unfair advantage

investment banks
investment bank
information shared establish price based on
underwrites the share
demand

After the information is properly shared with the investors, the investment banks

will now establish the price on the securities offered mainly based on the demand of the

prospective investors. Then they proceed on underwriting the shares.

When does underwriting occur?

When an investment banks bought securities from the issuing company and they

showcase these securities purchases in the market with a view to public distribution

representing the issuing company.

When From Whom Why

Bought securities
To showcase these securities
purchases in the market with a
Issuing company
view to public distribution
representing the issuing company

How does an investment bank earn then?

Of course, investment banks do not do it as a charity work. They need to incur

something out of their efforts in purchasing and selling these securities from the issuing

banks. These banks earn from their underwriting works by acquiring gross spread.
 These investment banks need to be extra careful when assessing the condition of

the market for them not to incur losses on their part and on the part of the issuing

company as well.

Gross Spread

Difference between the initial price paid from the issuing company of the

investment banks and the reoffering price when laid out to the general public.

Underwriting syndicate

Group of investment banks that was formed by the primary investment bank in

order to lower down the risk level of exhausting the securities of the issuing company

gross spread shared

Primary investment bank
securities reoffered by the underwriting
creates underwriting syndicate
syndicate

Distribution of securities is very crucial since it requires an enormous marketing

effort to issue all of them. Each investment bank in the underwriting syndicate must offer

these securities on their client base.

If the goal is not constantly reach, then the primary investment bank can form a

selling group excluded from the underwriting syndicate to further their investors reach.

Primary investment bank remaining gross spread shared by the

underwriting syndicate
creates selling group securities together with the selling
excluded reoffered group

On the other hand, investment banks do not buy securities from the issuing

company, instead they showcase their expertise in offering these securities in the general

public and gain gross spread through them.

 Potential investors and the general public put their trust on the underwritings

provided by the investment bank since they believe that these banks put their reputation

in line with their company’s assessment. It was also believed that the investment banks

have exercised their due diligence in valuing the issuing company’s securities.

b. Private Placement of Securities

Instead of offering the issuing company’s securities in the general public,

investment banks can also offer them on selected number of entities like pension funds,

insurance companies, and mutual funds.

c. Trading of Securities

Trading securities can be one of the functions of an investment bank. This kind of

service allows them to have a commission based income when they act as broker or

dealer between with the issuing company and the investor. As a dealer, they do not put

themselves on a risk level since there’s no capital required on their side. But on some

special cases, they use their own capital in trading securities.

When investment banks act as a market maker

 They earn from trading securities through price appreciation of security on hand

 Difference between the selling price and the actually price paid by them for the

security

Proprietary

 Prop trading
  Investment banks studies the future movements in price, interest, and foreign

currency

 Exposes two major risks: interest rate risk and credit rate risk

Interest rate risk

 The price of the long-term held securities might go down if the market rates went

up.

Credit rate risk

 Risk that the borrower may not pay their loans when due

d. Advisory services for mergers, acquisitions and financial restructuring

Capital restructuring and reorganizing financially afflicted companies needed help

from investment banks for them to have advisory engagements in looking for prospective

mergers and acquisitions.

Investment banks often provide advice for both buyer and seller since they have

an open access on their information that can help them properly recommend what to do

base on the potential sales, purchases and mergers. They can also look for potential

buyers who are willing to pay higher than the book value. After prospecting, they can

now prepare for acquisition estimations and bids.

estimate firm's value investment

companies investment bank
banks earn
seek for look for potential lead negotiations
from
help M&A prepare acquisition bids advisory
 Investment banks earn more from this depending on the sizeable portion of the

project advisory since they are not required to invest anything on this matter except for

the salary of the employee who constantly worked for it.

e. Merchant banking

Investment banks utilize and lend their money as a creditor and even buy shares to

be an investor but they took risk in this manner since their money goes through an equity

fund which is very risky.

f. Securities Finance and Prime Brokerage Service

One of the investment strategies of the investors is to enter in a repurchase

agreement (repo) when they opt to borrow funds in the security market rather than in a

bank since the agreement allows them to have the borrowed funds to be the collateral

itself. This agreement is often provided by the investment banks and they collected gains

on them through service fee charge.

Securities finance

 Borrowing securities or funds

Prime brokerage

 Offered by investment banks to have funds and investors

 Priority servicing for major clients

 Offers services like securities finance, global custody

g. Asset Management

Asset management services include the following:

  Endowments

 Insurance companies

 Pension funds

 Foundations

Investment banks earn through a percentage income from the assets they manage.

h. Research

This involves a thorough procedural process in indentifying a potential acquirer or

acquire by an investment bank on various market players.

Here the key process on the steps being done by an investment bank:

investment banks collect

visit firm identify
conduct research informatio inspect
and assign an and run an potential
n about the facilities
analyst interview acquirer
subject

The research information gathered by the analyst of an investment is published

publicly so prospects can foresee the chances that they’re going to buy, sell, or hold

stocks. Their findings and opinions have a huge effect on the market price as they can put

weight on investors’ perception.

The analyst can as well give relevant information about the current status of the

some variables that affects our economy like inflation, gross domestic product, and

interest rates.
FINANCIAL COMPANIES

These companies collect fund through issuing stocks and bonds and they usually raise

fund by selling commercial papers as well. Right after hedging enough funds, they would lend

out portions of it to individual consumers and small enterprises.

Collect fund through Raise fund by selling lend the money to

issuing stocks and bonds commercial papers individual consumers

Other Participants

There are other important participants who integrate themselves in buying and selling

various financial instruments aside from the financial intermediaries. Fellow market participants

were divided into five different sectors.

Household Sector

This sector is mainly composed of the following:

 Individuals and families

 Families serving charity

 Religious organizations

 Non-profit organizations

 Unincorporated businesses (retailers and professional partnerships)

All of the transactions in this sector cannot be simply separated from the owner’s

transactions.
Government

In this sector, it gives emphasis on regulating in all active participants in the market and

they raise fund in the governing help of the Bureau of Treasury. This bureau has the function on

managing the continuous improvement through disciplined and well-execution of integrity as it

provide effectiveness on its operational function.

It includes the following:

 National government agencies

 Local government units

 Government owned and controlled corporations

Corporate Sector and Non-financial Corporations

Financial corporations

 Depository institutions

 Investment banks

 Asset management companies

 Insurance companies

They act as financial intermediaries since they largely offer investment, advisory

services, and asset management services as a way to encourage private sectors in improving their

net-worth.

Non- financial corporations

They are originally engage and entitled in producing market goods and non-financial

services and their transactions are relatively distinct from those who own them. They issue
financial instruments in collecting funds in the money and capital market whenever they possess

an excess fund. They also offer pension plans for the retirement of their employees.

There are some non-financial corporations that have subsidiaries that involve in activities

same as the financial corporations and they were called as captive financial companies.

Captive financial company

The sole operation of this type of company is the provision of credit for customers of the

parent enterprise. It makes loan for the expensive services of the company to its customers.

Foreign Sector

This sector constitutes all the organizations, assets, personalities, and companies that’s

excluded within the jurisdiction of a certain country. It includes transactions with overseas

countries like the import and export of goods and services as well as the capital movements in

connection with financial transactions.

Foreign central bank and enterprises invest and put their capital in other countries

because of the following:

 To attain stability for their currency against with other foreign currency

 To achieve gains and return from the excessive funds

Supranational institutions

 An entity that is formed by the combination of two or more national governments

through national claimed treaties

 Example of each are the multilateral development banks

 Multilateral Development Banks

 An institution created by a group of countries that gives financing and advisory

for the sole purpose of development.

 Regional integration among countries was achieved

 Example of which are the European Investment Bank, World Bank, inter-

American Development Bank and Asian Development Bank

Non-profit organizations

These organizations are dedicated to further implementation of projects having a social

cause. They uses surplus of their revenues to achieve their objectives rather than distributing its

income to shareholders. These organizations include foundation and endowment.

QUESTIONS

True or False

___________1. Capital is strictly required for the investment banks to participate as a broker in

trading of securities between the issuing company and the potential investors.

___________2. Securities and Exchange Commission has the function on managing the

continuous improvement through disciplined and well-execution of integrity as it provide

effectiveness on its operational function.

___________3. Investment banks can both offer securities to public general and to some private

investors.
Identification

___________1. This agreement is often provided by the investment banks as it offers to borrow

funds in the security market rather than in a bank since the agreement allows them to have the

borrowed funds to be the collateral itself.

___________2. Risk that the borrower may not pay their loans when due

___________3. Difference between the initial price paid from the issuing company of the

investment banks and the reoffering price when laid out to the general public.

ANSWERS

TRUE OR FALSE

1. FALSE

2. FALSE

3. TRUE

IDENTIFICATION

1. REPURCHASE AGREEMENT

2. CREDIT RISK RATE

3. GROSS SPREAD