Agenda

1. Agenda Group 2 presents Presentation by Robert Hersey � Specialist on the NYSE with LaBranch and Company Review questions from Chapter 2 Discuss Chapter 3 Review materiel previously covered BRING YOUR QUESTIONS!! Begin Chapter 14 if time

2. Test will Cover Chapter 1 Real vs. Financial assets Financial intermediaries � Who are they and why do they exist Investment considerations Time horizon Risk preference Taxes Liquidity (be sure you understand this concept!) Financial markets Primary markets Secondary markets How technology has effected markets and trading Understanding of recent financial trends Globalization Securitization Financial Engineering �Bundling and unbundling cash flows and risk�

3. Test will Cover Chapter 2 Markets and instruments Money market (know what these securities are) Capital market (know what these securities are) T-Bills, Bonds and Notes Bank Discount Yield < Bond Equivalent Yield < Effective Annual Yield Compound versus simple interest Compound Annual Growth Rate Corporate Bonds (Investment grade versus high yield, rating agency ratings) Municipal Bonds Tax implications Formulas for comparing tax free interest to taxable interest Common Stock Calculating a return (Div. + Price appreciation) P/E ratio

4. Test will Cover Chapter 2 (continued) Preferred Stock Derivatives Option (exercise price, strike price, in-the-money, out-of-the-money) Put Call Forwards and Futures Selling �short� and �short interest� Part 1 of A Random Walk Down Wall Street Castles in the air Irrational vs. rational markets Differed periods of irrational pricing in the markets and what followed those periods Tulip bulbs, Shipping Cos. in England, Florida, 1920s in US, Real Estate in Florida, Biotech boom in the US, Conglomerate boom in the US, Japanese real estate and stock market, recent .com craze

5. Chapter Concepts Primary and Secondary Markets Organization of Secondary Markets Trading on exchanges Buying on margin Short selling and short selling margin

6. Primary vs. Secondary Securities Sales Primary Issuer gets proceeds Secondary Second parties sell among themselves Primary issuer gets no proceeds Investment Banking Arrangements Underwritten vs. best efforts Negotiated vs. competitive (neg. terms with investment bank versus structuring independently) New issues or IPOs are often under priced to ensure they are sold and that they will provide increase in price and provide a return for the investor

7. Public Offerings Registered with the SEC and sale is made to the public On the equity side this is an IPO � Initial Public Offering Shelf registration � Rule 415 (1982) Can have shares registered for 2 years and do the issuance at any time

8. Private Placement Sale to a limited number of sophisticated investors No registration protection Dominated by institutions 144A � Registered after the trasaction is completed Very comment with high yield corporate bonds Private placements of equity became very popular during the .com craze Private Equity firms

9. Organization of Secondary Markets Organized exchanges OTC Market Third market Fourth market The third and the OTC market are often confused. The third market is exchange listed securities traded away from the exchanges and save commission fees under the old fixed-commission regime. The third and the OTC market are often confused. The third market is exchange listed securities traded away from the exchanges and save commission fees under the old fixed-commission regime.

10. Organized Exchanges NYSE � New York Stock Exchange AMEX -American Stock Exchange CBOE Regionals Auction Market with centralized order flow Dealership function can be assigned by the exchange (Specialists) or competitive

11. OTC Market Dealer market without centralized order flow like the NYSE or AMEX NASDAQ � largest organized stock market for OTC trading Lost a lot of credability with the recent market declines following the gains of the 90s Most corporate bonds and all federal and municipal government bonds are traded OTC. Do not have to purchase a seat. Corporate bond market is thin and involves liquidity risk.Most corporate bonds and all federal and municipal government bonds are traded OTC. Do not have to purchase a seat. Corporate bond market is thin and involves liquidity risk.

12. Third Market Trading exchange listed companies away from the exchanges Institutional market for larger block trades(over 10,000 shares) Involves services of dealers and brokers

13. Fourth Market Institutions trading directly with institutions No middle man at all Organized information and trading systems ENC Development � Electronic Communications Network

14. International Markets London Stock Exchange Dealer markets similar to NASDAQ Greater anonymity Tokyo Stock Exchange No market making service Satori provides bookkeeping services Feature a floor and electronic trading Global Market Alliances

15. Logistics of Trading on Exchanges Specialist � Organized Exchanges Makes a market Maintains a fair and orderly market Maintains a book of orders The broker�s broker Dot and SuperDot system go directly to the specialist Settlement of all trades is three working days OTC � AMEX No negotiated market No specialists Can be many market makers Computer system for NASDAQ Negotiated through dealers. They sell from inventories at ask price and buy at bid. Problem with OTC or disadvantage of decentralized dealer market: investing public is vulnerable to trading through: The practice of dealers to trade with the public at quoted bid or ask even if other customers have offered to trade at better prices. Negotiated through dealers. They sell from inventories at ask price and buy at bid. Problem with OTC or disadvantage of decentralized dealer market: investing public is vulnerable to trading through: The practice of dealers to trade with the public at quoted bid or ask even if other customers have offered to trade at better prices.

16. Trading Vocabulary Commission � fee paid to broker for making the transaction Spread � cost of trading with dealer Bid:- price dealer will buy from you Ask � price dealer will sell to you Spread � (Ask � Bid) Combination � on some trades both are paid