CAPITAL MARKETS

1. Explain what capital market is.

A capital market is a financial market in which longer-term debt and equity instruments are being
traded. It is the venue for people who have and in need of capital wherein savings and investment
are being carried on. It is also composed of primary and secondary market.
2. Who are the primary issuers of capital market securities?
The primary issuers of capital market securities are National and local government and
corporations.
National government - issues long-term notes and bonds to fund the national debt
Local governments – issue notes and bonds to finance capital projects
Corporations – issue both bonds and stock to finance capital investment expenditures and fund
other investment opportunities.
3. What are the bonds? How are they traded?
A bond is any long-term promissory note issued by the firm. A bond certificate is the tangible
evidence of debt issued by a corporation or a government body and represents a loan made by
investors to the issuer.
Bonds are traded occurs in either a public offering, using an investment bank serving as a security
underwriter or through a private placement to a small group of investors.
4. What is the relationship between bond rating and expected rate of return?
Bond ratings involve judgment about the future risk potential of the bond provided by rating
agencies. It is affected by low utilization of financial leverage, profitable operations, low
variability of past earnings, large firm size, and little use of subordinated debt. The poorer the
bond rating, the higher the expected rate of return demanded in the capital markets.
5. Distinguish between ordinary or common stock and preferred stock.
Ordinary or common stock is a form of long-term equity that represents ownership interest of the
firm. Ordinary equity shareholders are the true owners of the corporation and consequently bear
the ultimate risks and rewards of ownership.
Preferred share is a class of equity shares which has preference over ordinary equity shares in the
payment of dividends and in the distribution of corporation assets in the event of liquidation.
In ordinary stock, there are voting rights bestowed in the ordinary equity shareholders while
preferred stock has none. Preferred stock shareholders have priority over the company’s income
and therefore they are paid dividends. Whereas in ordinary equity shareholders, they are the last
to acquire company assets, meaning, they will be paid out after creditors, bondholders, and
preferred shareholders.