FIN – 509

Investment Banking
 Learning Outcomes
• To understand the concept of investment
banking in detail.
News
• https://www.moneycontrol.com/news/eye-
on-india/videos/indias-gdp-to-contract-by-
7-7-in-2020-21-says-government-
6315301.html
What Is Investment Banking?
 Definition
• Investment banking is a specific division of
banking related to the creation of capital
for other companies, governments, and
other entities. 
 Basic functions
• Investment banks underwrite new debt
and equity securities for all types
of corporations, aid in the sale of securities
, and help to facilitate 
mergers and acquisitions
, reorganizations, and broker trades for
both institutions and private investors.
• Investment banks also provide guidance to
issuers regarding the issue and placement
of stock.

• Broadly speaking, investment banks assist

in large, complicated financial
transactions. 
 Understanding Investment
Banking
• Many large investment banking
systems are affiliated with or subsidiaries
 of larger banking institutions,
 Examples
• The largest being Goldman Sachs,
Morgan Stanley, JPMorgan Chase, Bank
of America Merrill Lynch, and Deutsche
Bank.
 Alternatively, can also be
defined as
• An investment bank is a 
financial services company or 
corporate division that engages in
advisory-based financial transactions on
behalf of individuals, corporations, and
governments.
 Website exploration
• https://www.goldmansachs.com/
Example of Investment Banking
• Suppose that Pete’s Paints Co., a chain supplying paints
and other hardware, wants to go public. Pete, the owner,
gets in touch with Jose, an investment banker working
for a larger investment banking firm. Pete and Jose
strike a deal wherein Jose (on behalf of his firm) agrees
to buy 100,000 shares of Pete’s Paints for the
company’s IPO at the price of $24 per share, a price at
which the investment bank’s analysts arrived after
careful consideration.
 Core investment banking
activities
• Investment banking is split into front office
, middle office, and back office activities.
• While large service investment banks offer
all lines of business, both "sell side" and
"buy side", smaller sell-side investment
firms such as boutique investment banks
 and small broker-dealers focus on
investment banking and
sales/trading/research, respectively.
 Front office
• Front office is generally described as a 
revenue-generating role.

• There are two main areas within front

office
• investment banking
• markets
 Middle office
• This area of the bank includes 
treasury management, internal controls
(such as Risk), and internal corporate
strategy.
 Back office
• The back office data-checks trades that
have been conducted, ensuring that they
are not wrong, and transacts the required
transfers. Many banks have outsourced
operations. It is, however, a critical part of
the bank
 Other businesses
• Global transaction banking

• Investment management
What Is an Investment Banker?
An Overview
• Investment bankers famously have a
central role in the launches of initial public
offerings (IPOs) by young companies
preparing to go public. However, that's just
one example of their work assignments.
• Investment bankers play a role in a
number of financial activities
• Arranging Financing
• If a large company wants to build a factory, it
probably doesn't have the cash on hand to do it. It
may decide to issue a bond to raise the money to
proceed with the project. The cost of the bond will
be paid from the increased production generated
by the new factory.
– Similarly, a government may need to finance
the construction of an airport, a highway, or
any other large municipal project. If it issues a
bond, it can do the work now and repay the
bond from future tax revenues.
• Equity Financing
• The most cost-efficient way for companies to
finance their growth and expansion is either by
selling bonds or by selling stock. The investment
banker also plays a role when it comes to
arranging the sale of stock, or equity financing.
• Underwriting Deals
– While arranging capital markets financing, investment
bankers often undertake the underwriting of the deals for
their clients. This means taking on much of the risk
inherent in the process by buying the shares outright
from the issuers and then selling them to the public or
institutional buyers.

– Investment bankers sell the shares at a markup to

generate profit for their employers. The difference
between the purchase price and the markup price is
called the underwriting spread.
• Typically, a lead investment banker works
with a group of investment bankers, called
a syndicate, to underwrite an issue so that
the risk is spread out among several
players.
• Arranging Private Placements
• Not all companies want to go public. Investment
bankers also help clients who prefer to raise
capital through private placements rather than on
the stock or bond markets. In such cases, the
investment banker is expected to have the
contacts and the credibility to get the sale done.
• Negotiating Mergers and Acquisitions
– Acquiring or merging with another company is generally
a drawn-out process of planning and negotiation.
Investment bankers often have an advisory role in that
process, particularly on arriving at a fair price for the
deal.

– Mergers and acquisitions can involve lengthy battles with

investment bankers on both sides of the table evaluating
a series of offers and counter-offers.
 Conflict of Interest Issues
• Investment bankers unquestionably help
grease the wheels of capital markets, but
they have attracted considerable criticism
while doing it. The potential for conflicts of
interest is at the center of much of that
criticism.
• Investment bankers have been accused of
pressuring analysts to favorably rate
securities to please their clients and
generate more investment banking
business.
• Another conflict of interest can occur if
investment bankers, who have access to
confidential information from clients
related to their business and prospects,
pass information to their firm's traders.
Traders can exploit this insider
information for an unfair advantage.
Business portfolio of Investment
Banks
• Investment banks handle significant fund-
based businesses of their own in the
capital market along with their non-fund
service portfolio, which is offered to
clients.
• The activities are segmented along 3
broad segments:

• 1. Equity market activity

• 2. Debt market activity
• 3. Mergers and acquisitions activity.
End of lecture