International Business Chapter 12

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Capital market loans to corporations can be equity and debt loans. What are the differencesbetween them?

Equity loan: corporation sells stocks to investors. A debt loan - corporation pays certain amount of loan at regular intervals

The main function of capital market

Bring together investors (corporations, pension funds) and borrowers (individuals,companies and governments)

2 main capital market makers

1.Commercial bank(indirect connection function)-profit from interest rate spread 2.Investment bank(direct function)-profit from commision

What is interest rate spread?

The difference between the rates of interest which commercial banks pay to investors and at which they sell assets to borrowers

Dividend is...

a payment made by a corporation to its shareholders, usually as a distribution of profits (NOT ALWAYS PAID,NOT FIXED IN ADVANCE)

What is the sum that a corporation required to pay in the debt loan?

Principal + the interest (regardless of the profit made)

Benefits of capital market for borrowers

1.Larger supply of funds available(not that limited liquidity as in domestic market) 2.Lower costs of capital(price of borrowing money)

Benefits for investors

1. Wider range of investment opportunities 2.Diversification of risks(due to movement ofstock market prices across the countries)

What does systematic risk refers to?

Movement to stock value that is attributed to macroeconomic forces that affect ALL firms in economy (level of nondiversifiable risk)

According to the studies of Solnik, why is international diversification so beneficial?

Because different stock markets appeared to be moderately correlated (low correlation)

Low correlation between the movement of stock market in different countries reflects

1.Different microeconomic policies and economic conditions 2. Different level ofcapital controls(cross-border capital flows)

2 factors that influence the growth of the global capital market

1. Information technology (facilitation of communication) 2.Deregulation of industry(before was one of the most regulated industry)

Global market capital risks

1.Speculative capital flows - threat for national economy(lack of quality information) 2.Hot Money(short-term) VS. Patient money(long-term)

What is eurocurrency?

Any currency banked outside of its country of origin(eurodollar outside the US). Can be produced anywhere in the world!

Characteristics of eurocurrency market

1. "Euro" is because of its European origins 2.High attractiveness of the market due to lack of government regulations

Drawbacks of eurocurrency market

1. Unsecure system,more risk of bank failure(because of less regulations) 2.Foreign exchange risks

2 global bond markets: foreign bond market and Eurobond market. What are the definitions?

For.bonds are sold outside of borrower's country in the currency of issued country.

Eurobond is

underwritten by international syndicate of banks and placed in countries others than the ones where the currency of bond is dominated

Companies list their stocks in the equity markets of other nation for the following reasons

1.Before issuing stocks in those markets to raise additional capital 2.Facilitate future stock swops 3.Increase company's visibility etc.