Intermediari finanziari - Financial markets and Institutions

SECURITIES: BONDS

As we said before securities are bonds and shares.

Both the government and the corporations can sell long or short term securities.

As regards the government, its short term securities are called TBILLS or BOT , in Italy.

TBILL stands for treasury bill. BOT stands for buono ordinario del Tesoro.

They pay interests as the difference between the isssuing price and the face value. Their

maturity is 6 months.

The government long term Securities are , in Italy, BPT and CCT.

BPT stands for buono poliennale del Tesoro. They need 7 years to mature.

CCT stands for certificato di credito del tesoro. They need from 5 to 8 years to mature.

Government securities are risk free and are liquid.

Among the securities we find bonds. Bonds have 3 prices:

1.ISSUING PRICE, the price at which they sell at the primary market

2.FACE VALUE, the price written on the bond that is the repayment at the end

3. MARKET PRICE, the price at which they sell at the secondary market.

Market Price is inversely proportional to the interest rate.

The simplest bond is the PLAIN VANILLA STRAIGHT BOND.

It printed, it has the name of the issuer on it, the face value, the date of emission and of

expiration, it has some coupons which correspond to interests. The bonds have the name of the

buyer, it is said to be on a bearer basis.

Each coupon is subjected to a withholding tax.

It is considered a FIX RATE INSTRUMENT, that is when you buy a bond you immediately

know what the income is. Opposite to the fix rate instrument is the FLOATING RATE BOND.

In this case you don’t know what the income is at the beginning and interests adjust.

They have their own ROLL OVER PERIOD, that is how often the interest rate is recalculated,

normally it is done every 6 months.

They have a REFERENCE RATE, that normally is the governmental bond’s one.

They depend on the SPREAD, that is the difference between the price that the seller proposes

and the price at which the buyer wants to buy.

A part from the plain vanilla bond we have other kinds of bonds.

ZERO COUPON BOND, it hasn’t got any coupon so you’ll be paid all your interests in only

one payment at the end. Remember that the interests are the difference between the price at

which you buy the bond and the price at which you sell it. 5

Normally is less risky that the normal bonds because you know that interest rate may rise but

even fall so this way you don’t risk any fluctuation because you will receive that amount

whatever the interest rate is.

Another type of bond is the CONVERTIBLE BOND, that is the case of regular bonds with

coupons. It gives the possibility to convert ordinary bonds into ordinary shares after 6 years.

You can also decide to keep your bonds and not to convert them. It’s a matter of deciding

whether you want to be a bondholder or a shareholder. Normally it happens when companies are

not so well known to sell shares that are more risky so they first sell bonds that are less risky.

BONDS IN WARRANT are bonds that guarantee to you that in 8 years time you’ll be able to

buy certain shares. The main difference between this and the other bond is that in this case you

can buy your shares and still keep your bond. You could also sell the warranty.

JUNK BONDS are the ones that are issued by unknown firms, They promise high return on

investment but they are really risky. They are located in the lowest grade according to rating

agencies. It happens when companies are start ups whose history is not so well known by rating

agencies to give their opinion. Companies with a low rating grade are forced to pay the

premium risk.

SECURITIES : SHARES

Before talking about shares we need to talk about JOIN STOCK COMPANY.

It is made up of shareholders, each shareholder has got shares and so he has the same right of

the others. Shareh decide for the person who will manage the company and they choose between

them a board of directors, nominated every 3 years. Shareholder meet once a year to analyse the

balance sheet and income statement, they have the right to get dividends.

Some shareholders are not interested in taking part to the meeting so they choose to buy

PREFERRED or PRIVILEGED SHARES , less than 25% ,instead of COMMON or

ORDINARY SHARES, and will have the right to meet abolished but will have the right to get

a higher dividend.

To sell and buy shares you need to have a look at the stock exchange where companies are listed.

To be listed means to have more opportunities to be known and bought, in other words to look for

new investors that can finance your activity. But it also means that you need to be clear with your

investors. You can’t have secrets, all your information will be available for everyone.

Listing is related to bonds as well. If the company is listed we talk about seasoned offer, that is the

bond is sold at the market price. If the company is unlisted we about initial public offer, that is the

bank has to fix the price. When this happens the bank tend to promise the best securities to its

customers, in fact IPO in the first hours are sky rocket, so they can do al lot of profits. But then they

make they price fall and peak up again.

FINANCIAL INSITUTIONS 2

1. commercial banks

2. central bank

3. post offices

4. leasing

5. factoring

6. consumer credit companies 6

LEASING was born in 1960s to sell computers. People used to buy them but they used to become

old model soon, moreover they used to be delicate. That’s why they were difficult to sell.

So the producer used to offer the machine at a rent. After the rent period the buyer could choose to

keep the computer or not.

Then the concept changed. It was no more the producer to do this but a company specialized in

leasing. So if a company wants a new computer it can choose to go to the bank and ask for a loan to

buy or it or simply go to a leasing company and ask for it to be rented.

Once it was a technique to sell now it ‘s a technique to finance.

Who provides the leasing service?

1. leasing companies

2. banks

3. leasing companies linked to a producer

FACTORING. When you manage a big company that sells products at a high price maybe you

won’t be able to get your payments all at a time. So you’d better have a PORTFOLIO OF

CREDITS. If you are not big enough as a company to have a financial sector that will manage your

portfolio for you maybe you need a factoring company that will do it for you, anticipating you the

money that you need to get from your customers.

Who provides factoring service?

1. banks

2. factoring companies

CONSUMER CREDIT MARKET. It’s the market of credit cards. Here we find 3 competitors:

1. fidelity cards, the ones give at dept stores

2. bank cards, visa circuit

3. T & E , travel and entertainment cards, American express

The principle is simple: you buy today , your money will disappear from your account in 1 month.

Normally clothes shops, restaurants, jewelleries, hotels apply for it but not tobacconists because

they have a small margin on their products. In fact there’s a fee that needs to be paid for this service.

A part of this fee is paid by the consumer but a 5-6 % is paid by the shop owner.

ASSETS MANAGEMENT

If an investor doesn’t want to take care if its money he can give the chance to do it to an asset

manager who will do 3 things basically:

1. assets allocation, he will decide where to invest this money, if in bonds, in shares and in which

country. It’s in terms of major assets classes.

2. stock/ bond picking, he will choose in which company he will invest your money

3. market timing, when to invest or cash out

All these activities have a cost, the management fee, that is 1 % on the assets of one year.

Funds can be managed in 2 main ways:

1. on a pool basis

2. on an individual basis

POOL BASIS In this case you need to have a capital of less than 1 million and it means pooling

the money together,

INDIVIDUAL BASIS , capital of more than 1 million and each person is treated as its own entity.

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As regards pool basis funds you have many possibilities:

1. open end mutual fund

→tracker funds EFTS

→ fund of funds

2 life insurance

3 pension funds

4 closed end mutual funds

→private equity

→venture capital

5 real estate funds

6 commodity funds

7 hedge funds

OPEN END MUTUAL FUND

It simply means you can enter and exit the found whenever you want.

Mutual funds pool the resources of many small investors by selling them

shares in the fund and using the proceeds to buy securities.

Only assets management company can manage this found. In Italy we have the SGR, società di

gestione del risparmio.

To set up a company like this you need 2 authorizations:

1. from CONSOB

2. from Bank of Italy

you also need an equity of 1 million minimum, and you need to have a good morality.

Then, even if you get the authorization to open your company you each and every found to be

authorized.

As an asset manager you need :

1. to sent information to the investor of his found every 3 months

2. to workout the net at the end of the day, that is to divide net asset value at the end of the day

for the number of shares. In this way you’ll get the new value of each share.

The main advantages of a mutual fund are:

1 liquidity

2 diversification

3 you don’t need to start with a huge capital

The asset management companies use 3 main channels to sell their products:

1 financial/ bank branches

2 financial sales people

3 internet, phone…

The AMC gives orders to SECURITY DEALERS (SIM) who have to physically buy shares and

there’s a DEPOSITORY/ CUSTODIAN BANK that certifies everything.

In an open end mutual fund you have some fees: 8

1 management fee that depends on the kind of fund and it’s 25-200 basis points per annuum.

2 entry fee that you pay flat, once, and it’s 1%

3 performance fee, a price for the assets manager who benches the market

4 other legal costs.

What is the benchmark?

It’s you reference index to understand if your fund is working well or not. Normally they use the

Stock Exchange Index.

Open end mutual funds are divided into:

1 tracker funds, ETFS

2 fund of funds

TRACKER FUNDS try to follow the performance of the index found, so they buy the same shares

and so same assets allocation of the index.

FUND OF FUNDS have a high degree of diversification so they reduce risk. It’s a mutual fund that

invest on another mutual fund however the expenses are doubled.

As we said before there are other ways of managing the assets on a pool basis.

LIFE INSURANCE, this method is quite similar to the mutual fund one but it’s less flexible

because you cannot choose when to invest and cash out. In general you have more limitations here.

PENSION FUNDS, In Europe you cannot decide how much money to put in the fund. Money is

detracted as a tax from your salary for INPS. In USA it’s on a voluntary basis.

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