Capital Markets and the Investment Banking Process Essay

1066 Words Aug 24th, 2006 5 Pages
Investment banks provide a wealth of critical services to our economy. One important role of the investment bank is to assist public and private corporations in raising funds in the capital markets. A second service is in providing strategic advisory services for mergers, acquisitions and other types of financial transactions. They also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. The focus of this paper will be to describe the investment banking process including the function of portfolio construction.
To better understand the investment banks role it is important to distinguish between what is known as the primary and secondary
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A syndicate is a group of investment banks. The investment bank makes money by selling the securities to the public at a par value per share above the price per share paid to the corporation. The investment bank does assume the risk that the price per share on the market could fall below the price paid by the bank before all the shares are sold in the market. There are three broad types of financial assets, fixed income, equity, and derivatives. Fixed income assets will provide either a fixed stream of income or an amount of income that is determined by a specialized formula. Fixed income securities come in a wide variety of maturities and payment provisions. On one extreme are money market securities. Money market securities are short-term, highly marketable, low risk, fixed-income securities. Examples include U.S. Treasury Bills, and Certificates of Deposit. The other end of the fixed income scale is capital markets which include long-term securities such as Treasury Bonds and bonds issued by Federal, State, and local municipalities, and corporations. Equity assets, better known as common stock, are the second type of financial assets. Shares of common stock represent an ownership in the company issuing the stock. Owners of common stock are not promised payment. Owners may receive dividends from the issuing company. The success of stock owners is directly tied to the success of the corporation; therefore, equity assets are riskier than

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