Showing posts with label secondary market. Show all posts
Showing posts with label secondary market. Show all posts
Thursday, 22 July 2010
Ex-Right Price
Ex-right price refers to the new stock and Right-on refers to the old stock.
Ro = right-on price , Rx = Ex-right price ,
N = Number of old shares required for 1 new, i.e.
number of rights required to buy one new share of stock.
Sb = subscription price = price at which the right holder can purchase the new stock
Ns = number of new shares
N = Number of rights / Ns .........................1
Ns = Fund to be raised / Sb ...........................2
Value of right = Ro - Rx .............................3
Ex-right price i.e. Rx = ( Ro * N + Sb) / (N + 1) .............4
Example:
XYZ ltd. has a funding requirement of 25 million rupees with 15 million shares of stock outstanding which are trading at Rs. 15. Subscription price is Rs. 9 and 1 right is granted for each share.
Calculate:
1. Number of rights required to buy a new share of stock
2. Ex-right price
3. Value of right
1. Ns can be got by formula 2
Ns = 25,000,000 / 9 = 2777778
Number of rights = number of shares as 1 right is granted for 1 share
By formula 1
N = 15,000,000 / 2777778 = 5.4
So 5.4 rights are required to purchase 1 new share of stock.
2. Rx can be found by formula 4
Rx = (15 * 5.4 + 9) / 6.4 = Rs. 14.0625
3. Value of right by forumula 3
V = Ro - Rx = 15 - 14.0625 = 0.9375
Secondary offerings
Companies that have gone public may later make further issues of stock to existing shareholders or other investors for the purpose of raising additional funds or for other reasons. For instance, the fallout from the global credit market crisis left many banks needing to shore up their balance sheets having suffered multi-billion dollar subprime losses. This resulted in a raft of secondary share offerings or rights issue emanating from top US and European investment banks (not all of which were successful due to donor fatigue setting in as more and more bank shareholders and other investors were tapped for cash).
Follow-on offerings of stock may include not only the issuance of new comon stock, but also preferred shares, mandatory convertibles, convertible preferred, and other forms of hybrid.
Some forms of secondary offerings:
1. Rights issue
2. Bonus issues
3. Stock splits and reverse stock splits
Follow-on offerings of stock may include not only the issuance of new comon stock, but also preferred shares, mandatory convertibles, convertible preferred, and other forms of hybrid.
Some forms of secondary offerings:
1. Rights issue
2. Bonus issues
3. Stock splits and reverse stock splits
Saturday, 17 July 2010
The Secondary Market of bonds
The secondary market is the market for bonds that have already been issued on the primary market. On the secondary market, investors trade bonds with other investors through financial professionals. The investors who sell the bonds receive the proceeds, minus fees or commission payable to banks/brokers that facilitate the transaction.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
Brokers and banks may purchase large numbers of bonds in the primary market and then sell them to investors in the secondary market. A bond may change hands a number of times on the secondary market before it reaches maturity.
The over-the-counter (OTC) market is the most common method of trading bonds on the secondary market. OTC trading refers to the buying and selling of bonds outside of an organized exchange. The market is made up of banks and brokerages that buy and sell bonds over the phone or electronically.
Many bonds are listed on a stock exchange, even though most trading is carried out on the OTC market. Stock exchanges are more transparent than OTC markets because prices and trading volumes are easily observable in exchange-traded markets. Despite this, exchange-traded volumes are still negligible compared to volumes on the OTC market.
The secondary market is the market for bonds that have already been issued on the primary market. The secondary market gives a price to bonds so that they can be sold before maturity.
On the secondary market, investors trade bonds with other investors through financial professionals. The original bond issuers normally play no part in the transaction at this stage. The investors who sell the bonds get the proceeds, minus fees or commission payable to the financial professionals who facilitate the transaction.
People Involved
It involves following people:
- Broker
- Dealers
- Market Makers
- Inter-dealer broker
- Broker-dealer
- OTC - most common way
- ETD
Trading Systems
The availability of automated trading systems and securities information systems has greatly enhanced bond trading. It accelerates trading and increases transparency for all market participants. In the US alone, bonds can be traded on over 80 trading systems.
These are the following:
- Tradeweb
- E-speed
- Eurex bonds
- NYSE bonds
Settlement and Taxation
Settlement
On the secondary market, settlement of trade usually occurs through domestic or international electronic clearing systems, such as Euroclear. Typically, settlement takes three business days (T+3), though it is sometimes shorter.
Taxation
Many countries charge a withholding tax on interest income and capital gains tax on capital gains from bonds.
Where a bilateral tax treaty exists between the issuer's country and the investor's country, the level of tax charged will be limited to the treaty amount. More and more countries are exempting non-residents from such taxes.
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