Chapter 2:

Firms and the Financial Markets

(Part 2)

Kent Bryan Martin, MBA

Quick Information: Private and Public Companies

VS

Private Company Public Company

 Initial Public
Offering (IPO)
Delisting
Private Company
Shareholders: Few and Private Individuals
An Initial Public Offering (IPO)
refers to the process of offering shares
of a private corporation to the public in
a new stock issuance. Public share
issuance allows a company to raise
capital from public investors.
Public Company
Shareholders: Public and Private Individuals
Businesses and companies
Delisting is the removal of a listed security
from a stock exchange. The delisting of a
security can be voluntary or involuntary and
usually results when a company ceases
operations, declares bankruptcy, merges,
does not meet listing requirements, or seeks
to become private.
Chapter 2: Part 2 Topics

✓ Continuation of The Basic Structure of Financial Markets

✓ The Financial Marketplace: Securities Markets
Chapter 2: Part 1 Review
1. BSP is responsible for the formulation of monetary policy (money supply)
and the regulation of member banks.

2. Financial Market is any place where money and credit are exchanged.
Within the financial markets, there are three principal sets of players that
interact: Borrowers, Savers (investors), and Financial Marketplace.

3. Financial Institutions -We call these institutions that help bring together
individuals and businesses financial intermediaries because these
institutions stand between those that have money to invest and those
that need money.

• Commercial Banks
• Financial Service Companies
• Insurance Companies
• Investment Banks
• Investment Companies
Financial Markets, Institutions, and the Circle of Money

Financial Markets:
Borrowers Financial Institutions
• Commercial Banks
Financing Repaid • Financial Service Companies
• Insurance Companies
Financial Marketplace • Investment Banks
• Investment Companies
Financing Obtained

Securities Markets
• Debt Markets
Savers • Stock Markets
(Investors)
2.4 The Financial Marketplace: Securities Markets
Security Markets provide a link between the corporation and investors. A security is a
negotiable instrument that represents a financial claim.

Types of securities:

1. Debt security or a debt agreement (bond). Bonds can be issued by a public or

private company and the government.

2. Equity security or a form of ownership (stock). Businesses and individual

investors can trade the stocks issued by public companies.

Public companies are publicly traded within the open market, and a variety of investors
buy the shares. Most public companies were once private companies that, after meeting
all regulatory requirements, opted to become public to raise capital.
Types of Securities: Debt Securities

Firms raise money by borrowing from investors. Debt securities usually issued to raise
funds for specific projects. In return, the firm promises to pay back the investment, with
interest, over a certain period of time.

If the debt has a maturity (the length of time until the debt is due) of between 1 and 10
years, it is often referred to as a note, and if the maturity is longer than 10 years, it is
called a bond; both are sold in the capital market, which is the market for long-term
financial instruments.

Most of these notes/bonds pay a fixed interest rate, which means that the interest the
owner of the bond receives never changes over its lifetime.
Types of Securities: Debt Securities

Who can issue bonds?

Corporate bonds are issued by a private or a public company. Companies issue bonds—
rather than seek bank loans for debt financing in many cases—because bond markets
offer more favorable terms and lower interest rates.

Municipal bonds are issued by states and municipalities. Some municipal bonds offer
tax-free coupon income for investors.

Government (sovereign) bonds such as those issued by the Bureau of Treasury. The
entire category of bonds issued by a government treasury is often collectively referred to
as "treasuries." Government bonds issued by national governments may be referred to as
sovereign debt.
Types of Securities: Debt Securities

For example:

Last January 1, 2021 Nike, Inc. issued a bond which has a face value or par value of USD
500,000 and that it pays a 4 percent coupon rate with two payments per year. The bond will
mature on January 1, 2031.

Bond Issuer: Nike, Inc.

Date: January 1, 2021 – January 1, 2031 (bond)
Interest Rate: 4%
Interest Payment Frequency: Semi-Annual (twice a year)
 Investment Investor
Nike Product Research and Development

USD 250,000
USD 250,000 BOND CERT

USD 150,000
USD 150,000
USD 500,000 BOND CERT

USD 100,000
USD 100,000 BOND CERT
Investment Investor Interest Rate: Maturity Date: Total Income:
4% Semi-Annual Jan 1, 2031 Jan 1, 2031

USD 250,000 USD 10,000 USD 250,000 USD 450,000

USD 150,000 USD 6,000 USD 150,000 USD 270,000

USD 100,000 USD 4,000 USD 100,000 USD 180,000

Sample Debt Notes
Sample Debt Notes
Chapter 2: Part 2 Key Takeaways

1. An Initial Public Offering (IPO) refers to the process of offering shares of

a private corporation to the public in a new stock issuance. While Delisting is the
removal of a listed security from a stock exchange.

2. There are two types of securities: debt security or a debt agreement (bond). It can
be issued by a public or private company and the government. Equity security or
a form of ownership (stock). Businesses and individual investors can trade the
stocks issued by public companies.

3. Bonds can be issued by the corporate (corporate bond), municipalities (municipal

bond), and the government (government bond)
Questions?