What can guarantee the success of the issue?



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ЗНАЕТЕ ЛИ ВЫ?

What can guarantee the success of the issue?



 

The New Issue Market

 

The mere buying of securites traded on the Stock Exchange does not create new capital. The stock exchange does not itself issue new shares to the public. Fresh capital is provided through the mechanism known as the New Issue Market.

The Market has no outward fqnnal organization or fixed place of business. Nevertheless it functions efficiently on the basis of a number of institutions working together: issuing houses, joint-stock banks, merchant bankers, insurance companies, stockbrokers, underwriters and others.

Issuing houses have become very active in the New Issue Market recently. An issuing house is a financial firm specializing in the issuing or floating of new securities for governments, municipalities and companies. Although this activity is not directly connected with the Stock Exchange, the Exchange is vitally interested in the activities of issuing houses; and the people who own and operate issuing houses have often been members of stock exchanges. The issuing house undertakes that the whole of a new issue of securities should be sold and makes all necessary arrangements for it.

It is charged with the entire "handling" procedure of the issue: this includes the arrangements for banks, other financial houses to share in the underwriting (only in a few cases do issuing houses underwrite the entire amount themselves); arrangements for the drawing up and publication of the prospectus.

Yet, even the most careful and competent handling will not guarantee the success of an issue. This depends on the attitude of the investing public, who will be guided very much by the reputation of the issuing house itself.

Issuing houses make arrangements with underwriters, who guarantee, for a commission, that if the public does not subscibe fully to the new issue the underwriters take up the remaining shares of the stock.

Underwriting is a process whereby a group of investment bankers agree to purchase a new security issue at a set price and offer it for sale to the general public.

Words you may need:

new issue market – ринок нових емісій

mere – простий

outward – зовнішній

issuing house – емісійний дім

underwriter – гарант розміщення цінних паперів

floating – випуск (акцій через біржу)

"handling" procedure – виконання всіх формальностей

 

žTESTS

I. Choose the correct answer:

 

1.The principal stock exchange in the United Sates of America is known as:

a) the NYSE;

b) Wall Street

 

2.Ready marketability requires that new issues should be made or backed by:

a) reputable borrowers or institutions;

b) law and financial intermediaries or institutions.

 

3.Jobbers:

a) act as agents for the public;

b) deal only with brokers and not with the general public.

 

4.Share indices indicate:

a) percentage changes in the market value of shares as compared with their value in the base years of the index;

b) percentage changes in share prices within the last three years.

 

5.The financial group of equities is broken down into:

a) capital goods, consumer goods, industry;

b) sectors, e.g. banks, discount houses etc.

 

II.Match what statements are true and what are false. Results write to the table:

1.The London Stock Exchange has the highest volume of trading in the world.

2.Women were allowed to deal on the Stock Exchange for the first time in 1973.

3.The London Bears and Bulls is a club for members of the Stock Exchange.

4.The Yakuza are a small group of brokers who operate in Kyoto.

5.Manhattan Island was once traded for beads.

6.The first members of the London Stock Exchange were evicted from their premises for bad behavior.

Table

 
True            
False            

 

III.Fill the tables:

a)

b)Characterize the following period by the processes which had place there:

 

17th – 18th centuries  
19th century  
The beginning of the 20th century  
1980s  

 

ì Unit 9

FINANCIAL MARKETS.

THE BOND MARKET

I. READING

  1. Stress the first syllable:

customer, borrow, surplus, primary, secondary, purchase, satisfy, debtor, syndicate, lender, government, equity, ownership, issue, uniform, domiciled, subsequently, nickname, issuer, Euro.

 

  1. Stress the second syllable:

financial, maturity, investor, security, available, perspective, appropriate, external, municipal, offshore, denominate, certificate, distinguishing, simultaneously.

 

  1. Stress the third syllable:

supranational, decompose, jurisdiction.

 

4. Read the text:

 

TRADING IN THE BOND MARKET

 

People and organizations wanting to borrow money are brought together with those having surplus funds in the financial markets.

There are a great many different financial markets, each one consisting of many institutions, dealing with different instruments in terms of the instrument maturity1 and the assets backing it, and serving different types of customers.

Generally, financial markets are classified as money or capital markets and primary or secondary markets.

Money markets deal in short-term securities having maturities of one year or less. Capital markets deal in long-term securities having maturities greater than one year. An investor who purchases new securities is participating in a primary financial market/ an investor who resells existing securities is participating in a secondary financial market.

So, when businesses, units of government or individuals cannot satisfy their needs for funds by revenue from sales of goods and services, they can turn to either debt financing (any process by which the firm gets cash or some other assets in return for a promise to pay an agreed upon sum plus interest) or equity financing (any process by which a firm raises funds in return for a share in its ownership and management).

Some sources of funds available to businesses (like issuing stock) are not available to governments. When revenues fall short of expenditures2 governments go into debt3 – they borrow short-and-long-term funds by issuing bonds.

A bond is an instrument in which the issuer (debtor/borrower) promises to repay to the lender/investor the amount borrowed plus interest over some specified period of time. It should be stressed that one of the most important characteristics of a bond is the nature of its issuer. Issuers include federal (central) governments and their agencies supranationals (such as the World Bank, the Asian development Bank), municipal governments, and nonfinancial and financial corporations.

By far the largest issuers are central governments.

There is no uniform system for classifying the global bond markets. Quite a number of financiers consider it appropriate to use the following classification. From the perspective of a given country, the global bond market can be classified into two markets: an internal bond market and an external bond market. The internal bond market is also called the national bond market. The internal bond market is also called the national bond market. It can be decomposed into two parts: the domestic bond market and the foreign bond market.

The domestic bond market is where issuers domiciled in the country issue bonds and where those bonds are subsequently traded. The foreign bond market of a country is where bonds of issuers not domiciled in the country are issued and traded.

Bonds traded in the US foreign bond market are nicknamed Yankee bonds. In Japan, foreign bonds issued by non-Japanese entities are nicknamed Samurai bonds. Foreign bonds in the United Kingdom are nicknamed bulldog bonds, in the Netherlands – Rembrandt bonds and in Spain – matador bonds.

The external bond market, also called the international bond market, includes bonds with several distinguishing features:

1) they are underwritten by an international syndicate;

2) at issue they are offered simultaneously to investors in a number of countries;

3) they are issued outside the jurisdiction of any single country;

4) they are in unregistered form.

The external bond market is commonly referred to as the offshore bond market, or more popularity, the Eurobond Market. The Eurobond Market is divided into different submarkets depending on the currency in which the issue is denominated.

Computerization in bond markets has reduced costs of trading bonds and made them more convenient to hold and transfer: they are not issued in certificate form – they are only computer entries.

NOTES:

1 in terms of the instrument maturity –з строків погашення фінансового інструменту

2 When revenues fall short of expenditures –Коли доходи менші за витрати

3…governments go into debt –уряди здійснюють позики

 

 

¤VOCABULARY LIST

financial market – фінансовий ринок

bond market – ринок облігацій

maturity – термін боргового зобов’язання

back – гарантувати, підтримувати

to serve customers – обслуговувати замовників

money market – грошовий ринок, ринок короткострокового капіталу

capital market – ринок довгострокового позичкового капіталу

primary market – первинний ринок

secondary market – вторинний ринок

deal (in) – торгувати

short-term securities – короткострокові цінні папери

turn (to) – звертатися (до кого-небудь)

debt financing – фінансування шляхом отримання позик

in return for – в обмін на

equity financing – мобілізація капіталу за допомогою випуску акцій

raise funds – отримувати кошти, мобілізувати капітал

share – частка

ownership – володіння майном

to issue stock (bonds) – випускати акції (облігації)

long-term funds – довгострокові кошти

issuer – емітент цінних паперів

debtor – боржник, дебітор

lender – кредитор

supranational – наднаціональна організація

municipal government – муніципалітет

by far – в значній мірі

uniform – єдиний

appropriate – відповідний

from the perspective of – з точки зору

internal bond market – внутрішній ринок облігацій

external bond market – зовнішній ринок облігацій

decompose – розкладати на складові частини

domiciled – той, що постійно проживає

subsequently – потім, пізніше, згодом

trade – здійснювати угоди на ринку цінних паперів

nickname –давати прізвисько

distinguishing feature – відмітна риса

underwrite – гарантувати розміщення цінних паперів

jurisdiction – юрисдикція

in unregistered form – незареєстрований

offshore bond market – офшорний ринок облігацій

eurobond Market – ринок єврооблігацій

submarket – субринок

denominate – виражати у валюті різної вартості

readily – швидко, легко

in certificate form – у формі сертифіката

computer entry – комп’ютерні дані

 

 

? ІІ. VOCABULARY EXERCISES

Ex.1. Find equivalents:

 

 

Ex.2. Enter correct correspondences in English or in Ukrainian:

ENGLISH UKRAINIAN
ownership  
  єдиний
debtor  
lender  
  цінні папери
long-term funds  
  юрисдикція
computer entry  
  у формі сертифікату
municipal government  
  обслуговувати замовників
to issue stock (bonds)  
maturity  
  мобілізація капіталу за рахунок випуску акцій

 

Ex.3. Find English equivalents for the following Ukrainian phrases:

мати справу з різними фінансовими інструментами; обслуговувати клієнтів; зі строком платежу менше (більше) одного року; брати участь в угодах на ринку; первинний та вторинний фінансові ринки; звертатись (до); фінансування шляхом отримання позик; мобілізація капіталу за допомогою випуску акцій; випускати облігації; обумовлений строк; емітент; єдина система класифікації; внутрішній та зовнішній ринки облігацій; емітент, що не проживає постійно в країні; облігації, якими торгують на ринку; випуск облігацій гарантований міжнародним синдикатом; випускати в незареєстрованій формі; офшорний ринок облігацій; скоротити витрати, що пов’язані з купівлею та продажем облігацій; випускати облігації у формі сертифікату; випускати облігації у формі запису у комп’ютері.

 

Ex.4. Fill in the blanks with prepositions, pronouns or conjunctions if necessary:

 

  1. Financial markets are classified … money … capital markets … primary … secondary markets.
  2. Money markets deal … short-term securities having maturities … one year … less.
  3. When businesses cannot satisfy their needs … funds … revenue … sales … goods … services they can turn … either debt financing … equity financing.
  4. Some sources … funds available … businesses are not available … governments.
  5. A bond is an instrument … which the issue promises to repay … the lender the amount borrowed plus interest … some specified period … time.
  6. One … the most important characteristics … a bond is nature … its issuer.
  7. The foreign bond market … a country is where bonds … issuers not domiciled … the country are issued … traded.
  8. Market is divided … different submarkets depending … the currency … which the issue is denominated.
  9. The external bond market includes bonds underwritten … an international syndicate and offered … investors … a number … countries.
  10. Computerization … bond markets has reduced costs … trading bonds … made them more convenient … hold … transfer.

Ex.5. Fill in the blanks below with the appropriate terms from the list:

nature; sources of funds; syndicate; issuers; securities; offshore; maturities; domestic; offshore; jurisdiction; system.    

  1. Money markets deal in short-term securities having __________of one year or less.
  2. An investor who purchases new _________ is participating in a primary financial market.
  3. Some ___________ available to businesses are not available to governments.
  4. A __________ of issuer is one of the most important characteristics of a bond.
  5. _________ include federal governments and their agencies, supranationals, municipal governments, financial and nonfinancial corporations.
  6. There is no uniform __________ for classifying the global bond markets.
  7. The national bond market consists of the _________ and foreign bond markets.
  8. The bonds in the international bond market are underwritten by an international _________ .
  9. In the external bond market the bonds are issued outside the ____________ of any single country.
  10. The external bond market is referred to as the _________ bond market.

 

Ex.6. Complete the following sentences:

  1. Financial markets are classified as … .
  2. Money markets deal in … but capital markets deal in … .
  3. An investor who purchases new securities is … and an investor who resells existing securities is … .
  4. A bond is an instrument in which … .
  5. Issuers include … .
  6. The global bond market can be classified into two markets: … .
  7. The national bond market can be decomposed into two parts: … .
  8. The domestic bond market is a market … .
  9. The foreign bond market is where … .
  10. The external bond market includes the bonds underwritten … used … .
  11. The international bond market is referred to as … .

 

Ex.7. Answer the following questions:

 

  1. What role do financial markets play?
  2. In what ways do financial markets differ?
  3. How are the financial markets classified?
  4. What is the difference between a money market and capital one?
  5. How do investors participate in the primary and secondary financial markets?
  6. In what ways can capital be raised?
  7. What ways of raising capital are available for government?
  8. What is the difference between money and capital markets?
  9. What is bond?
  10. What is the domestic/foreign bond market?
  11. What distinguishing features do the bonds offered in the external bond market have?
  12. How can the global market be subdivided?
  13. In what forms can government bonds be issued?

 

Ex.8. Translate into English:

 

  1. Фінансові ринки можна класифікувати як грошові ринки або ринки довгострокового позичкового капіталу і як первинні або вторинні ринки.
  2. Грошові ринки торгують короткостроковими цінними паперами, які мають при цьому cтрок боргового зобов’язання рік і менше.
  3. На ринках довгострокового позичкового капіталу строк боргового зобов’язання більше одного року.
  4. Інвестор, який купує нові цінні папери, є учасником первинного фінансового ринку.
  5. Інвестор, який перепродує цінні папери, є учасником вторинного фінансового ринку.
  6. Деякі джерела фінансування є доступними для підприємств, але не доступними для уряду.
  7. Облігація – засіб, за допомогою якого емітент обіцяє повернути кредитору суму, яку він позичив, плюс відсоток в обумовлений строк.
  8. З точки зору окремої країни світовий фінансовий ринок поділяється на внутрішній (національний) та зовнішній (міжнародний) ринки.
  9. На ринку облігацій зовнішньої (іноземної) емісії випускаються і продаються облігації емітентів, які постійно не проживають в країні.
  10. Акції міжнародного ринку облігацій мають певні відмінні риси.
  11. Комп’ютерізація на ринку облігацій зробила більш зручніші для збереження та переказу.

 

Ex.9. Match each term in Column A with its definition in Column B:


Ex 10. Write several paragraphs on the following using given words and word combinations:

a) financial markets:

to consist of; institutions; to deal with; instruments; maturity; assets; to serve; customers.

 

b) the classification of the financial markets:

money market; capital market; primary market; secondary market; to deal in; short-term securities; maturity; capital market; long-term securities; investor; to purchase; to participate; primary financial market; to resell; secondary financial market.

 

c) a bond as a financial instrument:

to achieve priorities, to allocate, to distribute resources, revenue, expenditure, to exceed, to prepare, to forecast, macroeconomic impact.

 

d) the classification of the global bond market:

an internal bond market; an external bond market; the national bond market; to be decomposed; the domestic bond market; the foreign bond market.

 

— III. ORAL PRACTICE

A. DIALOGUE

1. Read and translate the dialogue in pairs:

 

Foreigner: Financial markets are generally classified as money or capital markets and primary or secondary markets. Do you follow this classification?

Ukrainian: Yes, we do. But structurally we divide our financial market into hard-currency market, a bank credit market, debt and equity markets and the market of gold and precious metals.

Foreigner: I see. My experience in Ukraine tells me that your investors prefer operations in the hard currency market to investing in the real sector of your economy.

Ukrainian: Yes, our capital markets are thin, weak and vulnerable.

Foreigner: It’s a pity, because the debt market, for one, is a powerful instrument of monetary policy. Many governments issue bonds to solve their financial problems and to cover budget deficits.

Ukrainian: And how is the international bond market performing this year?

Foreigner: Volumes of issuance have been rather high, through fewer bonds have appeared from emerging markets of Eastern Europe.

Ukrainian: Investors are still viewing borrowers in emerging markets too risky, I suppose. Western sovereign borrowers are the main players in the market, aren’t they?

Foreigner: Well, yes, but many are trying to slow down their borrowing and reduce their national debt.

Ukrainian: This leaves room for other borrowers, right?

Foreigner: Yes, supranationals have diversified tremendously, both in their products and markets. Corporate borrowers are also very active.

Ukrainian: But after the crisis investors have become more cautious, haven’t they?

Foreigner: That’s right. Credit ratings of borrowers have become much more important. Investors demand transparency and liquidity. Borrowers are finding it much harder and more expensive to raise sufficient funds on the international debt market.

Ukrainian: How has the introduction of the Euro affected the bond market?

Foreigner: Some are thinking of Euro-denominated bond issues as the bond markets are moving away from the dollar in favour of the Euro. The competition is becoming keener.

Ukrainian: We are entering a new and turbulent phase in the debt markets. Many people believe that the worst is yet to come.

 

Vocabulary

structurally – структурно

hard-currency market – ринок твердої валюти

bank-credit market – ринок банківських кредитів

debt market – ринок позичкового капіталу

equity market – ринок акцій

market of gold and precious metals – ринок золота та дорогоцінних металів

real sector – реальний сектор

thin – вузький

issuance – випуск (акцій)

emerging markets – ринки, що розвиваються

sovereign borrower – суверенний позичальник, держава-позичальник

cautions – обережний

credit rating – кредитний рейтинг

Euro – євро (валюта)

turbulent – неспокійний, бурхливий

 

2. Read the dialogue, translate the Ukrainian remarks into English and act it out:

 

Ukrainian: З моєї точки зору, ми вступили в дуже складний період розвитку ринку облігацій. Все більш важливу роль відіграють великі інституціональні інвестори, об’єми випусків облігацій зростають, конкуренція на ринку загострюється.

Foreigner: Besides, big investors have power to demand more transparency and liquidity of the market.

Ukrainian: Нещодавня фінансова криза на ринках Азії здійснила негативний вплив на ринок позичкового капіталу. Інвестори почали проявляти велику обережність. Багато корпоративних позичальників відчувають труднощі із пошуком необхідних їм засобів.

Foreigner: Nevertheless the competition in the market in an advantage to borrowers who are trying to extend maturities.

Ukrainian: Так, це правда. Але інвестори можуть відмовитись від інвестування своїх коштів в облігації та перемістити свій капітал на більш привабливі фінансові ринки.

Foreigner: Of course, the bond market has become a dangerous place for borrowers and investors. However, the importance of our investor for the bond market continues to grow.

Ukrainian: Це, безумовно, так. Політична, економічна та фінансова стабільність вашої країни дозволяє вам успішно конкурувати на цьому ринку і здійснювати на нього великий вплив.

 

3.Make up a dialogue on the following:

 

You have to explain to your friend the structure of the bond market.

 

B. COMMUNICATIVE SITUATIONS

  1. Round-table discussion: “Future of the Ukrainian debt market”. Questions for discussion:
    • Prospects of restructuring Ukraine’s treasury bill debt and GKOs.
    • Your opinion about the role of Ukrainian government bonds as an instrument of monetary policy and a means to finance the budget deficit.

 

  1. You have an exam. The question is: “What is the difference between debt and equity market?”
  1. Express your attitude to the following: “How do you assess the Ukrainian Bond market?”

 

  1. Prepare a short talk on the following:
  • Prospects of restructuring Ukraine’s treasury bill debt and GKOs.
  • Your opinion about the role of Ukrainian government bonds as an instrument of monetary policy and means to finance a budget deficit.

¨READ AND DISCUSS

1. a) Supply the articles where necessary.

b) Write down 3-5 questions about the text.

c) Explain how the Eurobond Market operates.

 

The Eurobond Market

 

The Eurobond Market is … major source of corporate financing in … unregulated international capital market.

This market permits lenders to lend directly to borrowers across … national borders.

The borrowers or issuers of the bonds include MNCs, public sector organizations, sovereign states and commercial banks. The lenders or purchasers of the bond securities are individual and institutional investors, with … latter group dominating. Generally, purchasers buy Eurobonds in currencies other than their own and … major attraction of these bonds for investors s that in most currencies they are anonymous bearer bonds that exempt individuals from capital gains and withholding taxes in their own domestic system.

Banks play a major role in … Eurobond market by bringing together lenders and borrowers, underwriting the bond issue, selling or placing the bonds, supporting the secondary market in bonds, and managing the repayment of interest and capital to … investors. The participating banks will receive … fee for each of these services rendered to the borrower or investor.

The key to the market is … established and high quality credit rating with an internationally recognized rating agency such as Moody’s or Standard and Poor’s.

Eurobonds, of whichever currency denomination, are listed in another country and trade independently of any domestic market. In recent years there has been … contributed rapid expansion of Eurobond issuance that has been one of … most significant developments in bond markets worldwide.

In this context, there was one more fast-growing market that deserves … mention. It is the ECU (European Currency Unit) bond market which proved to be popular a few years ago and paved the way to the single Eurobond market.

 

Words you may need:

MNC (multinational company) – багатонаціональна компанія (корпорація)

anonymous – анонімний

Moody’s (Investors Service) – провідне агентство по встановленню рейтингів цінних паперів

Standard and Poor’s (Corporation) – провідна фірма по встановленню рейтингів цінних паперів

list – зареєструватись на біржі

ECU (European Currency Unit) – Європейська валютна одиниця (ЕКЮ)

 

2. a) Supply the prepositions where necessary.

b) Say what you have learnt about the debt market in India.

 

The door is slowly opening on India’s debt markets. Foreign investors can now invest 100% of their Indian portfolios in corporate debt as against the 30% allowed previously. He market itself is booming. … long-term debt worth Rs55 billion ($1.54 billion) raised by Indian corporates in the past few months and fixed-income returns overtaking those of equities, the market is ripe … reform.

The driving force … India’s debt market reforms is the need to raise capital … infrastructure projects. India needs .. about $300 billion … the next 10 years for infrastructure alone. Only half of this can be raised from the commercial banks, the equity market, the government and multilateral agencies like the World Bank. The other half must come from its domestic debt markets. But the Indian debt market is too small to meet this requirement at the moment.

So the market is moving ... the right direction and bonds – not shares – are the hottest selling investments in India today. In the past, equity markets overshadowed debt markets … both size and returns. While India’s total stock market capitalization is still equal … $138.6 billion, analysts say that investors are increasingly choosing bonds … equity. Of the total Rs16.74 billion was raised in debt floats. Returns … debt are also higher than from equity.

In spite of the government’s efforts, two major obstacles remain. The government bond market is still closed … investment banks. The other problem is liquidity.

Besides, secondary market trading in debt is limited … government securities and is done mainly on the wholesale debt market of the National Stock Exchange. Allowing market-making in government securities is the key … creating an active secondary debt market in India.

Having this mind the Reserve Bank of India – the Indian central bank – set … a system of primary dealers or makers in government securities. But for debt trading to be successful, several structural changes need to be put in place, including setting up a depository and establishing a REPO market.

 

Words you may need:

corporate debt – облігації, що випущені корпорацією

The market … is booming – На ринку ... спостерігається підвищення ділової активності.

fixed-income return – дохід по паперам з фіксованим прибутком

overtake – випереджати

ripe – готовий до чогось

overshadow – затьмарювати

capitalization – капіталізація

debt float – випуск боргових зобов’язань

primary dealer – первинний дилер

depository – депозитарій

REPO market – ринок РЕПО

 

3. a) Read the text.

b) Discuss the reasons which led to the creation of the UK debt market and its structural changes in the late 80s.

 

The UK Government bond market is generally the market of giltedged securities. These securities are considered to be very safe.

The market origins go back to 1694 when the Bank of England was founded to help the Government raise money to fight the French . borrowing to fiancé wars has been common and the outstanding amount of debt has soared during all of the major wars since then. The major expansion, however, came in the post-World War II period, especially in the 1970s and early 1980s. historically, the market developed with a strict separation between brokers and jobbers. The brokers did business with the public, but the jobbers did business only with brokers, and with each other.

On 27 October 1986 the market was structurally reorganized. As a result of the “Big Bang” the market switched to a new trading system, modeled on the US bond market. The essential change in this market was that a structure with separate jobbers and brokers was replaced with a structure with gilt-edged makers (GEMMs) who deal directly with large customers.

The gilt-edged markets constitute the major proportion of money passing through the Stock Exchange. Transactions are typically much larger than in the equity market.

UK gilts consists of two distinct markets, the short gilts market (securities with five years or less to maturity) and the market for medium and long gilts.

Some time in the past here were forecast that the gilt market would disappear by the end of the century. The Big Bang reforms succeeded in achieving one of the key objectives – to make the market accessible and attractive to international investors. There has been an increasing trend towards investors moving funds between the major bond markets, taking views on both the bonds themselves and the currencies involved. Now, in its current form it is firmly in the mainstream as one of the world’s most actively bond markets.

As to the UK corporate bond market, it has had a mixed history. Historically, it has been a major source of corporate funds but issuance virtually stopped during the 1970s and early 1980s due to high inflation and large government issuance.

In the last few years, the market has sprung to life again, helped by the fall in long-bond yields due to inflation fall and temporary disappearance of the government’s borrowing requirements.

 

4. a) Look through the text below to say what types of securities are described in it.

b) Reread the text more carefully and explain how the US government uses debt instruments.

US Government Securities

 

The US government relies heavily on debt financing. since the 1960s, revenues have seldom covered expenses, and the differences have been financed primarily by issuing debt instruments. Moreover, new debt must be issued in order to get the necessary funds to pay off old debt that comes due.

About two-thirds of the public debt is marketable, meaning that it is represented by securities that can be sold at any time by the original purchaser through government security dealers.

Marketable issuers include Treasury bills, notes, and bonds.

US Treasury Bonds have maturities greater than ten years at the time of issuance, with denominations ranging from $1,000 upward. Treasury bond issues have call provisions under which the Treasury has the right to force the investor to sell the bonds back to the government at par value.

US Savings Bonds are nonmarketable securities, offered only to individuals and selected organizations. There is a limit to the amount that may be purchased by any person in a single year. Two types are available: pure discount bonds and bonds that pay interest semiannually but can be redeemed for par value at any time.

To support credit for home purchase, the government has authorized the issuance of participation certificates. The most important certificates of this type are those issued by the Government National Mortgage Association (GNMA or “Ginnie Mae”), they are known as CNMA Modified Pass-Through Securities. Unlike most bonds, GNMA pas-through securities pay investors on a monthly basis an amount of money that represents both a pro rata return of principal and interest on the underlying mortgages.

US Corporate bonds. Corporate bonds are similar to other kinds of fixed-income securities. An issue of bonds is generally covered by an indenture, in which the issuing corporation promises a specified trustee that it will comply with a number of stated provisions, like the timely payment of required coupons and principal on the issue. The major types are as follows:

Mortgage bonds are debt that is secured by the pledge of specific property. In the event of default, the bondholders are entitled to obtain the property in question.

Collateral trust bonds are debt-backed by other securities that are usually held by the trustee.

Debentures are general obligations of the issuing corporation representing unsecured debt. A bond indenture will often require the issuing corporation to make annual payments into a sinking fund.

Words you may need:

treasury bond – довгострокові казначейські зобов’язання

call provision – умови позики, що передбачає право емітента достроково викупити цінні папери

par value – паритет, номінал

participation certificate – сертифікат участі

Government National Mortgage Association (GNMA) – Урядова національні іпотечна асоціація

pass-through security – цінний папір, що випущений на базі пулу іпотек

pro rata – пропорційний, пропорційно

fixed-income security – цінний папір з фіксованим доходом

indenture – письмова угода про емісію облігацій

trustee – довірена особа, опікун

mortgage bond – облігація, що забезпечена заставною під нерухомість

pledge – застава

collateral trust bond – облігація, що забезпечена іншими цінними паперами, що зберігаються на умовах трасту

unsecured debt – незабезпечений борг

sinking fund – викупний фонд, фонд погашення заборгованості

 

žTESTS

I.Choose the correct answer:

1.Money markets deal in:

a) short-term securities;

b) long-term securities;

Capital markets deal in:

a) short-term securities;

b) long-term securities.

 

2.An investor who purchases new securities is participating:

a) in a primary financial market;

b) in a secondary financial market.

 

3.The internal bond market is also called:

a) primary market;

b) secondary market;

c) external market;

d) national market.

 

4.A market where bonds of issuers not domiciled in the country are issued and traded is called:

a) the domestic bond market;

b) the foreign bond market.

A market where issuers domiciled in the country issue bonds and where those bonds are traded is called:

a) the domestic bond market;

b) the foreign bond market.

 

5.Bonds traded in US foreign bond market is called:

a) matador bonds;

b) Rembrandt bonds;

c) bulldog bonds;

d) Samurai bonds;

e) Yankee bonds.

II. Match what statements are true and what are false. Results write to the table:

 

1.There are many different financial markets, each one consisting of many institutions, dealing with different instruments.

2.Financial markets are classified only as primary or secondary markets.

3.Money markets deals in long-term securities having maturities of ten or less.

4.The largest issuers are central governments.

5.Capital markets deal in short-term securities having maturities greater than one year.

6.There is a uniform system for classifying the global bond markets.

7.The external bond market is commonly referred to as the Eurobond market.

Table

 
True              
False              

III. Fill the tables:

a)

 
 

 

 


b)

.

 

c) Name the foreign bonds of such countries:

 

Country Bonds
United States of America  
United Kingdom  
Japan  
Netherlands  
Spain  

 

 

 
 


d)

 

 

 

ìUnit 10

FINANCIAL MANAGEMENT

 

I. Reading

 

1.Stress the first syllable:

favourable, manager, maximize, shareholder, profitable, equity, adequate, merger, dividend, primarily, enterprise, statement, assets, inventory, balance sheet, mortgage, treasure.

 

2.Stress the second syllable:

important, concern, connection, investment, agreement, inventory, exchange, receivable, advisable, accumulate, relationship, controller, distribute, acquire, maintain

 

3.Stress the third syllable:

acquisition, variation, liability, proprietor, represent, variation

 

  1. Read and translate the text:

FINANCIAL FUNCTION

 

Any business – whether large or small, profit-seeking or not-for-profit – has important financial concerns:

How to get the funds needed to run the business on favourable terms and how to make sure that the funds are used effectively?

In this connection modern businesses have financial managers to look after these problems, whose major objective is to maximize the value of the firm for its owners, i.e. to maximize the shareholders’ wealth, which is represented by the market price of a firm’s common stock.

Managers daily face like the following:

w What assets to acquire?

w Will a particular investment be profitable?

w Where will the funds come from to finance the investment?

w How much to maintain as equity capital?

w Does the firm have adequate cash or access to cash – through bank borrowing agreements, for example, to meet its daily operating needs?

w Which customers should be offered credit and how much should they be offered?

w How much inventory should be held?

w Is the merger or acquisition advisable?

w How should profits be used or distributed? What is the optimal dividend policy?

w How should the firm behave in the situation of exchange rate variations and interest rate changes?

w How should risk to which the firm is exposed and return be balanced?

Financial managers are primarily concerned with the management of fixed assets, working capital management and current liabilities, cash management, receivables management and inventory management; they are responsible for designing capital structure, choosing long- and short-term financing techniques.

The financial manager has to take these decisions with reference to the objectives of the firm.

To have a better understanding of how managers go about all these concerns one should know what resources managers typically have at their disposal. The position of an enterprise, its assets and capital are best illustrated by its financial statements – the balance sheet and the income statement.

The first major component of the balance sheet of an enterprise is its assets, which are the resources owned by the enterprise. The standard classification of assets divides them into:

1)fixed assets;

2)currents assets;

3)investment assets;

4)other assets.

Fixed assets are assets purchased for use in the business on a permanent basis, e.g. land and buildings, plant and machinery, furniture, motor vehicles, etc.

Current assets are short-term in nature. They are also known as liquid assets and include cash, marketable securities, accounts receivable (debtors), notes/bills receivable and inventory, including finished goods or wok in process.

Investments represent investment of funds in the securities of another company, the purpose of which is either to earn a return or/and to control another company.

The second major component of the balance sheet is liabilities of the enterprise, which represent the amount that the enterprise owes to other enterprises, or the outside sources which the enterprise uses to finance its assets. They are: long-term liabilities (obligations payable after the accounting period) – debentures, bonds, mortgages, secured loans – and current liabilities (obligations usually repayable within the accounting period) – accounts payable, bill/notes payable, accrued expenses, deferred income and short-term bank credit.

The third major component of balance sheet is the owners’ equity – part of the resources of a firm which are supplied by its owners – shareholders. The owners’ equity may consist of two elements: paid-up capital (the initial amount of funds contributed by the shareholders) and retained earnings (part of the profits of the shareholders which is not paid out to them as dividends but ploughed back in the business).

Capital is the store of accumulated wealth contributed to the firm by its proprietors – it is the net worth of the business to the owners. Fixed capital is capital tied up in fixed assets. Working capital is the capital available for working the business. When an enterprise has bought fixed assets it still needs further capital to buy raw materials, etc., or money to pay wages.

The finance function in a firm is usually headed by a chief financial officer (CFO), who reports to the firm’s president.

The chief financial officer distributes the financial management responsibilities between the controller and the treasurer.

 

FINANCIAL RATIOS

A financial ratio is a relationship between particular groups of assets or liabilities of an enterprise and corresponding totals of assets or liabilities, or between assets or liabilities and flows like turnover or revenue.

A leading example is the price/earnings ratio which is the ratio of the current quoted stock exchange price of an equity to the most recent declared dividend per share.

Another is the ratio of equity to debt finance (gearing ratio) within a company’s overall capital structure.

Financial ratios are used to give summary indications of the financial performance, prospects or strength of a company which help financial managers to make a comparison of a firm’s financial condition over time or in relation to other firms.

No single financial ratio can answer all questions analysts may have.

In fact, five different groups of rations have been developed:

a)liquidity ratios indicating a firm’s ability to meet short-term financial obligations;

b)activity ratios indicating how efficiently a firm is using its assets to generate sales;

c)financial leverage ratios indicating a firm’s capacity to meet short- and long-term obligations;

d)profitability rations measuring how effectively a firm’s management generates profits on sales, assets, and stockholders’ investments;

e)market-based ratios measuring the financial market’s evaluation of a company’s stock.

¤ VOCABULARY LIST

 

financial management – управління фінансовою діяльністю, фінансовий менеджмент

finance function – організація фінансової діяльності

concern – справа, заклопотаність

maximize – довести до максимуму

common stocks – прості акції

acquisition – поглинання (компанії)

to be exposed to risks – бути схильним до ризику

management of fixed assets – управління основними засобами

working capital management –управління поточними активами

management of current assets – управління оборотними засобами

management of current liabilities – управління короткостроковими зобов’язаннями

cash management – управління грошовими операціями

receivables management – управління дебіторською заборгованістю

inventory management – управління запасами, матеріально-технічним оснащенням

capital structure – структура капіталу

long-term/short-term financing – довгострокове/короткострокове фінансування

assets – активи

financial statements – фінансова звітність

balance sheet – балансовий звіт

income statement – звіт про фінансові результати

liquid assets – ліквідні активи (засоби)

accounts receivable – рахунки дебіторів

notes/bills receivable – векселі до отримання

work in process – незавершене виробництво

liabilities – зобов’язання

accounting period – звітний період

mortgage – заставна

accounts payable – кредиторська заборгованість

bills/notes payable – векселя до сплати

accrued expenses – нараховані витрати

deferred income – прибутки майбутніх років/періодів

equity – акціонерний капітал

paid-up capital – сплачена частина акціонерного капіталу

retained earnings – нерозподілений прибуток

dividends – дивіденди

to plough back – перетворювати на капітал

net worth of the business – власний капітал фірми

fixed capital – основні фонди (засоби)

working capital – оборотний капітал (засоби, фонди)

chief financial officer – віце-президент корпорації по фінансам/фінансовий директор

controller – фінансист-контролер, що проводить аналіз господарської та обліково-фінансової діяльності

treasurer – казначей компанії

financial ratios – фінансові коефіцієнти/показники

price/earnings ratio – відношення ринкової ціни (акції) до чистого прибутку компанії (в розрахунку на одну акцію)

gearing ratio (debt-to-equity ratio) – відношення заборгованості до власного капіталу

indication – показник

analyst – економіст-аналітик

liquidity ratio – коефіцієнт ліквідності

financial leverage ratios – частка позичкових засобів в сукупному капіталі

? II. VOCABULARY EXERCISES

 

Ex.1. Find equivalents:

       
 
  1. activity ratio
  2. secured loans
  3. equity capital
  4. investments
  5. current assets
  6. current liabilities
  7. long-term liabilities
  8. treasurer
  9. fixed assets
  10. merger
  11. controller
  12. acquisition
  13. profitability ratio
 
 
a) інвестиції b) придбання c) об’єднання d) скарбник компанії e) фінансист-контролер f) власний капітал g) основні фонди h) оборотні фонди i) коефіцієнт активності j) коефіцієнт прибутковості k) позика під забезпечення l) довготермінові зобов’язання m) короткотермінові зобов’язання  


 

Ex.2. Enter correct correspondences:

ENGLISH UKRAINIAN
  фінансовий менеджер
  акціонер
income statement  
  інвестування
summary indication  
  активи
  фінансова звітність
particular investment  
  балансовий звіт
deferred income  
  ліквідні засоби
working capital management  
  нерозподілений прибуток
financial performance  
  основний капітал
  оборотний капітал
cash management  
  фінансовий показник
financial leverage ratio  

Ex.3. Find English equivalents for the following Ukrainian phrases:

 

управління фінансовою діяльністю; на вигідних умовах; ефективно використовувати фінансові засоби; придбавати активи; злиття та поглинання; дивідендна політика; бути схильним до ризику; управління основними засобами; управління поточними активами; управління оборотними засобами; управління короткостроковими зобов’язаннями; управління дебіторською заборгованістю; управління запасами; структура капіталу; фінансова звітність; балансовий звіт; звіт про фінансові результати; основні засоби; оборотні засоби; рахунки дебіторів; векселі до отримання; незавершене виробництво; заставна; кредиторська заборгованість; векселі до сплати; нараховані витрати; прибутки майбутніх років; сплачена частина акціонерного капіт



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