金融英语教案

金融英语教案 Financial English Teaching Scheme By: Wu Yineng Objectives of this course: ? Make it a professional course, not a pure English course ? Reading easy financial reports and papers ? Understanding financial concepts ? Making Presentations ? All the terms shall be remembered ? The exam paper is designed in English I will not translate the textbook sentence by sentence, but you should read pages I assign. Lecture I Investment Banking Inspiring Question: Imagine you are the CEO of Sinopec Petroleum. Now you are planning to build a ipeline from Xingjing to Shengzhen, the investment of which will be as much as 10 p million Yuan. How Can you get so much money for the pipeline project? Students’ possibly reply: (1) Use the company’ s Money (2) Borrow money from commercial banks—bank loans (3) Ask an investment bank for help –to issue debt or equity securities The ways of financing a project: Traditional ways: (1) bank loans ,Commercial banking (2) debt securities ,Investment banking (3) equity securities ,Investment banking on-traditional ways: N (4) Venture Capital (VC) (5) Private equity (PE) (6) Angel Investment (AI) (7)credit derivatives, such as CDS(credit default swap信息违约互换) and CDO (Collateralized Debt Obligation，担保债务凭证) So in this lecture we will learn what is investment bank, why people need investment banking, the financial market for investment banking, financial instruments of investment banking and relative calculations. Part I Introduction Section A—The basics 1. investment banks/ banking/ bankers (1) Investment banks are intermediaries between people who have money and people who need money. (Textbook) An investment bank is a financial institution that assists individuals, corporations, and governments in raising capital by underwriting(承担) and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary(辅助的，附加的) services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.(Wekipedia) 1 投资银行，简称投行，是一种以经营证券业务为主的金融机构。现代意义的投资 银行基本不属于银行的范畴，而是一种专业证券机构(大陆称为券商)。根据国 家和时代，投资银行一词的具体内涵也有所不同。通常，一个完整的投资银行包 括了重组并购、企业融资、证券发行、承销、研究、投资咨询、经纪、资产管理、 财富管理等一系列业务，但也有的只专精于某几个方面的业务。在中文语境中， 较狭义的投资银行仅指证券承销和并购业务。(维基中文) The 2008 financial credit crisis led to the notable collapse of several banks, notably including the bankruptcy of large investment bank Lehman Brothers and the hurried sale of Merrill Lynch and the much smaller Bear Stearns to banks which effectively rescued them from bankruptcy. The entire financial services industry, including numerous investment banks, was rescued by government loans through the Troubled Asset Relief Program (TARP). Surviving U.S. investment banks such as Goldman Sachs and Morgan Stanley converted to traditional bank holding companies to accept TARP relief. Top 10 banks Further information: List of investment banks The ten largest investment banks as of December 31, 2011, are as follows [11](by total fees from advisory). The list is just a ranking of the advisory arm of each bank and does not include the generally much larger portion of revenues from sales and trading and asset management. Rank Company Fees ($m) 1. JP Morgan Chase $5,517.62 2. Bank of America $4,945.45 3. Morgan Stanley $4,066.30 4. Goldman Sachs $3,852.95 5. Credit Suisse $3,434.32 6. Deutsche Bank $3,178.15 7. Citigroup $3,166.33 8. Barclays $2,793.70 9. UBS $2,362.69 10. Wells Fargo $1,597.99 富国银行 2 Unlike commercial banks and retail banks, investment banks do not take deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm –Leach –Bliley Act), the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G8 countries, have historically not maintained such a separation. There are two main lines of business in investment banking. Trading securities for cash or for other securities (i.e. facilitating transactions, market-making), or the promotion of securities (i.e. underwriting, research, etc.) is the "sell side", while advising or managing assets (through mutual funds or hedge funds) on behalf of pension funds or the investing public (who consume the products and services of the sell-side in order to maximize their return on investment) constitutes the "buy side". Many firms have buy and sell side components. An investment bank can also be split into private and public functions with an information barrier which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.(此段可不讲) (2) investment banking Investment banking is the process of getting and managing money. (3) investment bankers Investment bankers are the people, the experts, who work for investment banks and help individuals, business and governments to reach their financial goals. 只要是为投资银行工作的专业人士，都统称投资银行家。 2. investment bank’s business(P130) (1) providing advice and guidance ? helping you set realistic and appropriate financial golas and ? developing strategies to reach them; (2) arranging for the money you need at the lowest possible cost, including: ? drafting prospectus(起草招股说明书) ? Road show ? IPO (3) helping you manage financial risk; and (4) buying and selling financial instruments like stocks and bonds. In addition: (5) Research: ? making researches on companies (for selling or buying their securities) ? setting mathematic models for hedging. 设计对冲的数学模型 3 (It is said this is the time of hedging rather than portfolio现在已经从“投资组合时代”进入 了“对冲时代”) (6) technology: making electronic trading software Section B—Setting Goals We only talk about business or government who are in need of investment banking. 1. What may be the goals of a business to raise money ? (1) money for investment, such as: building a new factory buying the latest equipment, developing a gold mining property, doing advanced scientific reaearch, Attention: ―buy‖ is constructing a major oil pipeline, different from ―buy out‖ (2) money for mergers and aquisition (6) buying out a competitor 2. What may be the goals of a government to raise money? A government revenue usually comes from Taxation. However, when a government needs more money than the tax revenue, the government is possibly to issue debt securities, for: (1) develop infrastructures, such as ? roads, highways and bridges ? mass transit (buses, subways, light rails) ? water treatment facilities, ? power generations ? communication networks (2) building new schools (3) provide tax and investment incentives Section C – Needs and Money (omitted) Section D – An Overview of Markets A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties(交易各方) engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers. It can be said that a market is the process by which the prices of goods and services are established. Three Main Markets: ? Markets for Goods, ? Markets for services, and ? Markets for use of money , financial markets 4 A market can be ACTUAL or VIRTUAL. 1. The financial marketplace ? Demander (Buyers) in financial marketplace: individuals, families, companies and governments (who are in need of money); ? Suppliers (Sellers) in financial marketplace: People or organizations who have surplus money to their current needs and are willing to make it available to those who need it. Actual financial marketplace: stock exchange Virtual financial marketplace: any electronic trading system 2. Supply and Demand Price: the mechanism that markets use to balance supply and demand and to have the transaction take place. The price here may Price of a refer to: bond/ stock (1): price of a bond: (2): price of a stock Supply of money (Read the last paragraph of P135) P* (If we change the coordinates of the price diagram in microeconomics: from quantity of Demand of money goods to quantity of money, from price of goods to price of a bond/stock, from supply of Quantity of money good to supply of money, from supply of goods Market Equilibrium to supply of money, we get the price of money in the financial marketplace). 3. Matching buyers and sellers Who make the matching: An intermediary How to match: via financial instruments (specifically underlying financial instruments) Read the last paragraph on P136. 4. Primary and secondary markets Case Study: How to Cash a certificate(or a security, or a draft) before it’s maturity?怎 样提前兑现(有价)凭证(或证券或汇票)。 Read the Case : Paragraph 2, P138. Solution: the certificate holder sell it to another investor, (usu. by discount or by settlement of the due interest.) Read Para 4, P138. That led to the concept of Primary market and secondary market. According to the textbook, Transaction between the insurance company and the manufacturer is in Primary Market; Transaction between the insurance company and the bank is in Secondary Market. 5 Definition of Primary and secondary market (Read the first Para on P139.) The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain bonds through the sale of a new stock or bond issue. This is typically done through a syndicate[disambiguation needed] of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Features of primary markets are: , This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). , In a primary issue, the securities are issued by the company directly to investors. , The company receives the money and issues new security certificates to the investors. , Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. , The primary market performs the crucial function of facilitating capital formation in the economy. , The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." , The financial assets sold can only be redeemed by the original holder. The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae(房利美，美国联 邦国民抵押贷款协会) and Freddie Mac(房地美). With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market. Section E How Suppliers Make Their Money Available? (1) Loans Supplier Demander 6 Lender borrower Creditor债权人 debtor债务人 A creditor is a party (e.g. person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money. The term creditor is frequently used in the financial world, especially in reference to short term loans, long term bonds, and mortgage loans. In law, a person who has a money judgment entered in their favor by a court is called a judgement creditor. The term creditor derives from the notion of credit. In modern America, credit also refers to a rating which indicates the likelihood a borrower will pay back his or her loan. In earlier times, credit also referred to reputation or trustworthiness. A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterparts of this debt arrangement is a bank, the debtor is more often referred to as a borrower. ----(from Wikipedia) (2) Investments An investment can be made into real estate or into a business. Investment banking involving in investments is usu. by purchasing shares in the company who is running it. The three most commonly used investment instruments are: real estate, loans (or debts) and shares. Distinguish between loans and shares Loan holders Share holders Revenue from Interest and dividend and fluctuation of debt fluctuation of stock price price ownership N Y Repay of principal Y N Consequence of Force issuer into Can not get default bankruptcy principal back Section F What Suppliers of Money Expect—The Motive 7 They expect return of : interests, dividends, and/ or profit. Section G Buying and Selling the Right to Use Money (omitted) Section H How Long Can the ―Buyers‖ Use the Money? 1. short term, medium term, and Long term of a loan Short term: to repay the principal after one year or less Medium term: ~after more than one year but less than ten years Long term: ~after ten years 2. Fundamental Principle of Finance #1: The longer the term related to a loan or investment, the higher will be the expected rate of return. Because of: ? higher opportunity cost (Para 2, P144) ? more things uncertain may happen (Para 3, P144) Explain the two paragraph of text. Section I –Can Suppliers Always Be Sure of Getting Their Money back? 1. Four possible situation in finance market that a money supplier will get ? as much as he expected ? all the principal but zero profit ? part of the principal ? none of the principal 2. Fundamental Principle of Finance #2: The higher the risk related to a loan or investment is, the higher will be the expected rate of return. Judgment: ? Debentures(企业债券) issued by AAA-ranking companies usu. have lower interest rate than those issued by A- ranking companies. (T) ?Senior debentures(优特债) usu. have lower interest rates than subordinate debentures(次级债). (T) ?When a government gets into financial troubles, the interest rate or yield to maturity(到期收益率) will probably rise. (T) ? subordinated debts(次级债) have higher interest rate than common debts. (T) Section J – Words and Expressions Read the Words and Expressions after the teacher. 8 9 Part II The Financial Marketplace Section A Introduction In Part I, we talked about the financial markets, and know it is a place where people who need money meet people who have money to supply. The purpose of money supplier, or investors, to supply money is for interest or for capital return. The purpose of money demander, usu. a company, is to use the money for their business or for mergers and acquisition. This is the course: a investor provides money to a Company, while the company issue a certificate of using the money to the investor. The certificate is probably a debt or a stock. This course can be presented in the follows diagram. 1. Diagram of the course of financing 2. What a well-developed financial market will be? See the last para. on P148. Here we have two points to understand. (1) So well-developed are many financial markets around the world that an almost unlimited variety of financial needs can be met. 世界上许多金融市场是如此的发达，以至于(在这些市场上)基本上无数种金融 需求都能得到满足。 This sentence implies a very famous hypothesis: (2) efficient-market hypothesis (EMH) In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. 有效市场假说(Efficient Market Hypothesis)又叫效率市场假说，有效市场 假设。该假说认为，投资者在买卖股票时会迅速有效地利用可能的信息。所有已 10 知的影响一种股票价格的因素都已经反映在股票的价格中，因此根据这一理论， 股票的技术分析是无效的(,不可能长期获得高于市场平均回报的收益)。 According to Frederic S. Mishkin, profession of Columbia University and the author of The Economics of Money, Banking and Financial Markets, the hypothesis can be simply expressed as: the expected return on the security will equal the optimal forecast of the return, i.e. e0fR=R 即:证券的预期收益=收益的最优预测 There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". More specific content of the hypothesis or theory is beyond my lecture, you can read in the seven edition of The Economics of Money, Banking and Financial Markets, which explain more prudently than wikipedia. Section B –The Participants Section C – The Places There are lots of financial marketplace in the world. A financial marketplace can be a physical place like Shanghai Security Exchange, New York Stock Exchange, a commercial bank, a investment bank, or even your home. It can also be a intangible or notional market like Nasdaq or bond market. Therefore, the places for financial market are classified into two groups: the physical markets and the intangible markets (1) Physical Markets ? Stock exchange or security exchange ? Branches and offices of financial intermediaries: Investment banks Commercial banks Savings and Loan Associations (S&Ls) 储蓄贷款协会 mainly for mortgage loans for residential housing. Mutual Savings Banks互助储蓄银行 11 Credit Unions信用社 Life Insurance Companies人寿保险公司 Fire and Casualty Insurance Companies财产保险公司 Pension Funds and Government Retirement Funds养老金及政府退休基金 Finance Companies金融公司 Finance companies raise funds by selling commercial paper (a short-term debt instrument) and by issuing stocks and bonds. They lend these funds to consumers, who make purchases of such items as furniture, automobiles, and home improvements, and to small businesses. Some finance companies are organized by a parent corporation to help sell its product. For example, Ford Motor Credit Company makes loans to consumers who purchase Ford automobiles. Mutual Funds共同基金 Money Market Mutual Funds货币市场共同基金 These relatively new financial institutions have the characteristics of a mutual fund but also function to some extent as a depository institution because they offer deposit-type accounts. Like most mutual funds, they sell shares to acquire funds that are then used to buy money market instruments that are both safe and very liquid. The interest on these assets is then paid out to the shareholders. A key feature of these funds is that shareholders can write checks against the value of their shareholdings. In effect, shares in a money market mutual fund function like checking account deposits that pay interest. Money market mutual funds have experienced extraordinary growth since 1971, when they first appeared. By 2002, their assets had climbed to nearly $2.1 trillion. ? someone’s home ? Commodity exchange ? Futures exchanges (2) Intangible or notional market ? Shares Nasdaq 12 Over-the counter market Over-the-counter (OTC) or off-exchange trading is done directly between two parties, without any supervision of an exchange. In the U.S., there are OTC traded stocks and OTC contracts. It is contrasted with exchange trading, which occurs via these facilities. An exchange has the benefit of facilitating liquidity, mitigates(减轻) all credit risk concerning the default of one party in the transaction, provides transparency, and maintains the current market price. In an OTC trade, the price is not necessarily made public information. OTC trading, as well as exchange trading, occurs with commodities, financial instruments (including stocks), and derivatives of such. Products traded on the exchange must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in trading. The OTC market does not have this limitation. They may agree on an unusual quantity, for example. In OTC market contracts are bilateral (i.e. contract between only two parties), each party could have credit risk concerns with respect to the other party. OTC derivative market is significant in some asset classes: interest rate, foreign exchange, equities, and commodities. (--from Wikipedia) OTC-traded stocks In the U.S., over-the-counter trading in stock is carried out by market makers using inter-dealer quotation services such as OTC Link (a service offered by OTC Markets Group) and the OTC Bulletin Board (OTCBB, operated by FINRA). The OTCBB licenses the services of OTC Link for their OTCBB securities. Although exchange-listed stocks can be traded OTC on the third market, it is rarely the case. Usually OTC stocks are not listed nor traded on exchanges, and vice versa. Although stocks quoted on the OTCBB must comply with U.S. Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks have alternative disclosure guidelines (for example, OTCQX stocks through OTC Market Group Inc), and others have no reporting requirements, for example Pink Sheets securities. ? Bond market Attention: unlike what is mentioned on P151 of the textbook, bonds are usu. traded in an exchange rather than over the telephone. ? Mortgage market It’s over the counter dealing. ? Currency market Foreign currencies are traded mainly via internet today. ? Derivatives market Section D The Products 1. debt 13 (1) government debts ? Treasury bills(T-bills): term within one year (short term) ? Treasury Notes(T-Notes): term over 1 year but within 10 years(medium term) ? Treasury Bonds (T-Bonds): term over 10 years (long term) (2) debentures A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. (See also on the last para. on P154) (3) Operating bank loans营业贷款 (4) interbank lending 同业拆借 (5) mortgage loans 2. equity (1) ordinary shares (2) preferred shares (3) equity derivatives Section E –The Term We have mentioned short, medium and long term of financial instruments. Markets for short instruments are also termed as ―the money market‖, while markets for medium and long term instruments are usu. called ―the capital market‖. 1. the money market (1) treasury bills (2) interbank lending (3) negotiable instruments ? promissory note: Commercial paper and cashier's check商业本票和银行 本票 注意:课本上把commercial paper译成“商业票据”是不准确的，应译作 “商业本票”。 Link: the document of ―Promissory not) 14 ? commercial draft and banker’s acceptances商业汇票和银行承兑汇票 Draft is also termed bill of exchange. Commercial drafts are often used in international trade, while banker’s acceptances are often used in domestics business. 15 Supplement reading: draft and promissory note Promissory note A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand to the payee, or at fixed or determinable future time, certain in money, to order or to bearer. (see Sec.194) Bank note is frequently referred to as a promissory note, a promissory note made by a bank and payable to bearer on demand. Promissory note includes commercial paper and cashier’s check. [edit] Bill of exchange A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque (check in American English), defined as a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used primarily in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date. Prior to the advent of paper currency, bills of exchange were a common means of exchange. They are not used as often today. Bill of exchange, 1933 A bill of exchange is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order. A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn 16 endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable. In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor. (wikipedia) 1(汇票的三个当事人: DRAWER出票人:出具汇票的人，国内贸易中一般是债务人(买方)，但在 17 国际贸易中，却常常是债权人(卖方，即出口商)。 drawee受票人，实际上是付款人即payer。一般是债务人或与债务人有业务来往的企业或银行。 在国内贸易中一般是债务人(买方)的开户行或债务人指定的一家公司或个人;但在国际贸易中，又分为两种情况:?在进出口托收业务中，通常是进口人，?在信用证业务中通常是开证行、保兑行或其他指定的银行。 payee收款人。收款人一般是债权人(卖方，出口商等)，或与债权人有业务来往的个人、企业或银行。 2(汇票的三种抬头 (1)指示性抬头: 指示性抬头，又称记名抬头，即写明收款人的名称。最常见的写法是: ?Pay to the Order of John Smith(付款给约翰?史密斯的指定人) ?Pay to John Smith or Order; (付款给约翰?史密斯或其指定人) ?Pay to John Smith 。(付款给约翰?史密斯) 指示性抬头的汇票，可由收款人背书(endorse/ endorsement)转让，受 让人可继续背书转让。 (2) 限制性抬头 限制性抬头，写明收款人，不仅不得转让，而且只有汇票上收款人才能 收款，比较死板。实务中常见有以下写法: ?Pay to John Smith Only (仅付款给约翰?史密斯) ?Pay to John Smith Not Transferable (付款给约翰?史密斯，不得转让) ?Pay to John Smith,然后在票据正面加注“Not Transferable”的字样。 我国《票据法》规定，出票人在汇票上记载“不得转让”字样的，汇票 不得转让，即相当于上述限制性抬头的写法。限制性抬头的汇票不可流 通转让。这种汇票不能当作金融票据。 (3)来人抬头 Pay to the bearer 付款给持票人/来人。 既不写收款人，也不需要背书，只要是持有这种汇票的人，就可以兑付 现金。 18 3(要注意的是，在我国，汇票是要求写明“汇票”字样的，而在英国及英联邦区域，汇票上可能没有“draft‖或“bill of exchange”字样。 4(汇票一般有“付一不付二，付二不付一”的国际例。 其中，“一”和“二”指的是汇票的第一联和第二联，并非国际贸易或国际结算课本中所说的第一份和第二份。 5.汇票的分类: (1)sight drat and time draft即期汇票和远期汇票 即期汇票上有:pay„at sight(见票即付) 远期汇票上一般有:pay„XXX days after sight(见票XXX日后付款) 你能读懂下面这个汇票吗,Can you explain the following bill of exchange (2)documentary draft and bare draft跟单汇票和光票汇票 *this second of exchange是指本汇票的第二联 2. the capital market 19 (1) bonds and debentures (2) term bank loans定期银行存款 (3) common and preferred shared Section F – Marketability and Liquidity (1) Marketability: how quickly and easily a particular financial instrument can be bought or sold. The larger the number of buyers and sellers is, the more marketable the market is. (2) Liquidity: how easily a security can be converted into cash or other assets, esp. without lowering the price. 20 Part III Debt Securities Section A: Introduction 1. What is debt securities? Debt securities are financial instruments that cor4porations and governments sell to the public to raise money for various purpose. I made the definition shortened or concise. stRead the 1 para. on P159. 2. How does an investor in debt securities earn a return? ? from interest ? form fluctuation of debt prices, esp. for a long-term bonds or debentures. It means to earn a return by buying a debt at a lower price but sell it at a higher price, or selling short it at a higher price but buying back it at a lower price. 3. Types of Debt Every Business requires various types of debt for its operational finances. Followings are the general categories defined out of various types of debt; (1) Secured and Unsecured Debt有保护的债券和无保护的债券 A secured debt is protected with some asset as collateral, such as a mortgage loan. A secured debt owed to the creditor is when the borrower pledges some asset like property or car etc. The debt obligation is then considered as secured against the collateral. In this case if the borrower gets default then the creditor cam take possession of the collateral asset and may sell it to recover his debt amount. Unsecured debt is the opposite of the secured debt it comprised financial obligations. It is not connected with pledges and collateral of the borrowers instead of this the creditor don’t recourse to the assets of the borrower to satisfy their claims. (2) Private and Public Debt私募债和公募债 Private Debts: bank loans Public Debt: T-bills, T-Notes, T-bonds, debentures Examples of Private debt are all bank loan type obligations, whether senior or mezzanine(中间层) mostly and typically unsecured and subordinated. In compensation of the high risk debt holders require a higher return against the investment. Whereas all the financial instruments which are freely trade 21 able on a public exchange or on a counter is a general definition of Public debt, may be with or without restrictions. (3) Syndicated and Bilateral Debt银团贷款和双边贷款 When a syndicate(辛迪加，企业联合) of banks agrees to grant a portion of principle sum to companies and allows the lead banks to write the debt to reduce their risk and to free up the lending capacity it is mentioned as syndicate debt account. Certain institutions such as companies and governments are used to issue bond which is a debt security. The bearer or the holder of the bond is entitling for the repayment of the principle amount with interest. The issuance of these bonds in the market place for the investors is made when an institution wants to borrow money. Bonds have a fixed life time usually in years and at the end of the bonds life the bearer of the bond should be repaid his full investment amount and with interest if not paid in installments. Bonds are traded in the market and relatively safe investment. Bonds are the debt of the investors. (4) coupon bond and discount bond(Zero Coupon Bond) A typical coupon in the Republic of China era. Attentions: there are no more physical coupons in today’s market any more, as bonds and/or debentures are issued electronically to save cost. Section B – General Characteristics of Debt Securitas 1. Face Value or Principal面值或本金 The face Value of a bond is usu. 100 US dollars. ? if issued at discount:FV>Principal=Purchase price ? if issued at par: FV=Principal=Purchase price ? if issued at premium: FV current yield > coupon yield , a premium: coupon yield > current yield > YTM , par: YTM = current yield = coupon yield. , Current Yield = Total Yield - Capital Gains Yield 23 The current yield is the annual payment divided by the price. Algebraically expressed as Y = R/P, where Y is yield, R is the annual payment, and P represents price. This creation shows the fine line between high and low returns over more than one period. A high yield will produce a relative payment and a low yield will do the same. When the yields of several periods are compared a higher yield will show a higher payment with less risk associated. This equates to investors expecting a higher yield over a length of investing. The possibility of market risks are ignored. (3)Example Calculation To calculate the current yield of a bond with a face value of $100 and a coupon rate of 5.00% that is selling at $95.00 (clean; not including accrued interest), use: 9(Yield to maturity Yield to maturity is often used for a coupon. (1) if the coupon is paid for interest once a year, CCCCC，FaceDPV,P,，，，？？，， 22n,1n1，r(1，r)(1，r)(1，r)(1，r) Where: r: yield to maturity P: price of a bond C: cash flow of the bond, in general case C= Face × coupon rate Face: the face value of a coupon. DPV: discount present value If we know P and C, we can solve r from the equation. But you can not work it out manually when n>3. You have to use some software, such as excel or matlab to help you solve the equation of high degree. We will study these methods in the course of Finance Engineering, which is also lectured by me. (1) if the coupon is paid for interest twice a year, ，CCCCCFace,,，，，？？，，DPVP rrrrr222n,12n1，(1，)(1，)(1，)(1，)22222 In the above two equation, ―P‖ is calculated from discount of very cash flow on the basis of compound interest. Obviously, the price is the present value of all the cash flow. Because the present value is calculated from discount, the present value is also called discount present value. 24 10(Issuers and bond rating发行者及债券评级 The issuer can be: central government, state and local government, a company, or a financial institution. As the issuer is also the debtor, it’s financial status and capacity to earn profit is key to repay the debt. To evaluate this capacity, a grading system called bond rating has been created. There rating system are widely accepted all over the world, which are graded respectively by three CPA firm: Standard & Poor, Moody and Fitch(标普、穆 ). 迪和惠誉 Junk bonds: bond rated under speculative grade Read the table on P164 and the last para. in the frame on P162. 11. Collateral or security Collateral means the assets that are pledged by an issuer t secure repayment of a debt security. Connected to secured debt. A collateral can be anything valuable, such as a house, a Rolex watch, a gold brick, a car. 12. Default拖欠 Either of the following two situation is a default: (1) fail to make payment of interest, and /or (2) fail to repay the principal in due 13. Risk-free interest rate无风险利率 Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. One interpretation is that the risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time. Another interpretation is that the risk free rate is the compensation that would be demanded by a representative investor holding a representative market portfolio, comprising all the assets in the economy, (i.e. the risk free rate is the compensation for systemic risk which cannot be eliminated by holding a diversified portfolio.) It is the second interpretation which is applied in the Capital Asset Pricing Model. CAPM model: r,,(r,r)，r iimff Where: thr: the revenue rate of the i stock or a representative market porfolio i r: the revenue rate of a portfolio, comprising all the assets m r: risk-free interest rate f β: (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns(当“市场组合”发生变动时，任何一 项资产发生相应变动的敏感程度), or also, ,cov(r,r)imim,,, i2var(r),mm 25 When (Tend to infinity), r,r (according to Sharp model), then: m,,mf r=r if (Proofed ) Section C – Short Term Debt (Omitted) Short term debt includes mainly treasury bills, banker’s acceptances, commercial paper, draft, promissory note. In addition, L/C are actually a instrument for short term debt. We have studied short term debt in section A. Section D – Long-term debt: bonds and debentures Most of concepts about long-term debts have been introduced in section A. Here I want to emphasize to concepts: redemption and convertibles. 1. redemption See explaintion of ―repayment‖ on P166. callable bond (redeemable bond) A bond that can be called (redeemed) by the issuer prior to its maturity, on certain call dates, at call prices. On the call dates, the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at the call price. Technically speaking, the bonds are not really bought and held by the issuer, but cancelled immediately or no longer accrue interest at the original coupon rate. Attention: call right in a callable bond is not a call option. We will further study the concept of callable bonds in finance engineering. 2. Convertible security/ convertible 可转债 注意:convertible一个单词即可以

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示“可转债”。 Convertible: A hybrid security that can be converted into stock Read the para. on P166. Attention: convertible contains a call option right for the buyer. We will further study the concept of convertibles in finance engineering. 26 Part IV Equity Securities Market trend: Bull market, bear market and pig market Bears, bulls and pigs are found in the stock market. Bull makes money. Bears make money. Pigs get slaughtered. Question 1: What is a bull market or bear market? A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames. A pig market is a market where prices move horizontally. Anyhow, I doubt this concept is made up by Chinese, as there is no term of “pig market” in Wikipedia. (我怀疑“猪市”是中国人杜 ) 撰的，因为维基上找不到“猪市”这个词条。 The terms bull market and bear market describe upward and downward market trends, respectively, and can be used to describe either the market as a whole or specific sectors and securities. Question 2:How to make money in a bear market? Answer: to sell short of a stock via Margin trading-short (融券), which means to borrow a stock from an investment bank, to sell it at high price, and then buy back the stock of the same quantity to return to the investment bank. In the whole course, the stock is sold at high price and bought at low price, which makes a profit of course. It is a sell short, as it generate cash from “first sell, then buy” strategy. Section A—Capital structure 1. right and obligations of debt holders and equity holders Distinguish between loans and shares Loan holders Share holders Revenue from Interest and dividend and fluctuation of debt fluctuation of stock price price ownership N Y Repay of principal Y N Consequence of Force issuer into Can not get default bankruptcy principal back 2. Distinguish between shares, stocks and equities Any of the equal parts into which the capital stock of a corporation or company is divided. 缩写 sh.,shr.股份:一个合作公司或公司的股票资金被分成相等部分的任一份 Stock:stock is the security that a company issue (although there are no physical securities nowadays). 所以stock才是真正能译成“股票”的。 Equity: equity is a legal word, it refers to an equitable right or claim from stocks.所以 equity应译成“股权”。 27 3. How are a company’s shares first issued to investors in the equity market? Via IPO, i.e. initial public offering. Homework: Translate the following paragraphs. Machine translation is forbidden. The capital stock (or stock) of an incorporated business (合股公司,)constitutes the equity stake of its owners. It represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders' equity cannot be withdrawn from the company in a way that is intended to be detrimental (有 害的)to the company's creditors. 一家合股公司的股本(或股票)构成其所有者的权益基础(stake“树桩”我将 之意译为“基础”)。它代表着这家公司在分配完所有优先分配权(如有保护 或无保护债券)之后，属于股东的剩余资产。股东的权益(股权)不能以故意 损害公司债权人的方式从公司撤离。 The stock of a corporation is partitioned into shares, the total of which are stated at the time of business formation. Additional shares may subsequently be authorized by the existing shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared par value, which is a nominal accounting value used to represent the equity on the balance sheet of the corporation. In other jurisdictions, however, shares of stock may be issued without associated par value. 一家公司的股本(stock)被划分为很多股份(shares)，总股本在公司建立时就应确 定。如果公司要发行额外的股份，应由现有的股东同意之后才能改行。在某些 国家的法律体系中，每一股股份都有一个指定的面值(par value)，该面值是公 司的资产负债表中用于表示权益的名义帐面价值。但是在另一些国家的法律体 系中，各股可以以不同的面值发行。 Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares. In the United Kingdom, Republic of Ireland, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities. 28 29