An investment bank is a financial institution that typically specializes in large, complex transactions, such as underwriting an Initial Public Offering (IPO), mergers and acquisitions, direct investment into start-up firms, or advising large institutional clients on investments/transactions. In short, investment banks help create the bridge between large enterprises and the investor. In that sense, IPOs are one way to accomplish this, but they also help businesses secure financing in other ways, such as through bond issues or derivative products. Continue reading...
Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it. They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium. Continue reading...
The Inverted Cup-and-Handle (sometimes called Inverted Cup-and-Holder) pattern forms when prices rise then decline to create an upside-down “U”like shape (1, 2, 3, also known as the Cup), followed by a shorter relatively straight price increase that bounces from the right lip (from 3 to 4, creating the Handle). The rising handle forms as a result of mounting buying pressure created when the security retests a low at the right lip of the cup. Once the buyers give up, sellers take over and the security has the potential to decline rapidly. Continue reading...
Currency baskets are composed of weighted amounts of certain currencies. The most common use of a currency basket is as a benchmark for certain economic analysis, but it can also be used as a unit of account where an international organization has constituents that use various currencies. A basket of currencies is a weighted index of various currencies which serves a specific purpose as a benchmark or as a unit of account. Continue reading...
Underwriting is the process through which risks are accepted by an institution. Underwriting is the assessment of risk or the acceptance of risk after such assessment by a company or bank. Underwriters in insurance companies will assess a risk prior to the company accepting the risk; once the risk has been accepted the company bears the burden of covering the potential losses associated with the risk. The company is paid a premium for accepting the risk. Continue reading...
A leveraged loan is a commercial loan that is generally created by a few participants, and packaged and offered by one or several investment banks. Leveraged loans are typically targeted at companies that already have a significant amount of debt and may be limited in their options to access capital elsewhere. They are considered on the higher end of the risk spectrum. Continue reading...
Investment bankers are proficient analysts themselves, but they have subordinate financial analysts that crunch the numbers for them. They are primarily in the business of procuring clients for deals such as IPOs which their investment bank will underwrite. Investment bankers are employees of investment banks whose role is to acquire clients for the bank and to be the liaison between clients and the back office of the investment bank. Continue reading...
A yield curve is an illustration of the current duration-to-yield relationship for bonds of the same credit rating but different durations. As a general rule, the longer the duration of the loan, the more risk you take on (since you don't know what might happen with that corporation in the future), and therefore, you demand a higher reward (i.e., higher coupon). The yield curve for any bond (not just the US Treasury Bonds) changes daily based on many economic and market factors. Continue reading...
If a municipality or company decides to issue bonds, they will need to form an alliance with an underwriting entity to help them price and distribute the bonds, and the Purchase Agreement outlines their contract. Underwriters on debt issues are normally large investment banks. They help the issuer, which could be a city government or company, structure the bonds and price them in a way that is suitable to their needs, and also agrees to help them distribute them. Continue reading...
The notion of who bears risk for various sorts of failures, circumstances, or losses is a prevalent one in the financial world, and many institutions make all of their money accepting risks. To accept a risk is to bear the burden of loss or replacement if an event occurs that causes an asset to lose value or disappear. There is a bright side to this, however. There is a real and theoretical “risk premium” due to those who accept a risk. Continue reading...
International equity funds hold stocks of corporations based outside of the United States. International equity funds invest mostly in the stock of overseas companies. People purchase shares of such funds as a means of globally diversifying their portfolio. There is some degree of currency risk involved in international investments, which may necessitate a currency hedging strategy if an investor is heavily invested across the globe. Continue reading...
An Accelerated Share Repurchase (ASR) is a method by which companies can buy back a significant amount of their outstanding shares with the help of an investment bank. By enlisting the help of an investment bank to accelerate a buy-back, a company can cleanly retire a large bulk of shares at once. These agreements have come into use in the last 10 years, and there is of course some variation in their composition. They fall under a category of buybacks known as structured buybacks. Continue reading...
When a lending institution offers a Bank Guarantee, they are reducing the risk involved in a transaction by guaranteeing payment to the seller. Bank Guarantees often come into play with deals made internationally, where the participants in the deal prefer to have some assurances before they do business. The guarantee acts as insurance to protect the parties involved in transactions where they are not fully able to assess the strength and reliability of the other, such as when small companies bid for projects or when bids for a job come-in from around the world. Continue reading...
Systematic risk is the broad risk of fluctuations and downturns in the market as a whole, which it is said cannot be eliminated through diversification. Systematic risk is also known as market risk, which is the exposure of all investors to the broad movements and downturns of the market as a whole. Theoretically it cannot be controlled for through simple diversification, since that would only bring a portfolio closer to the broad market performance, with a Beta closer to 1. Continue reading...
International banking regulations set forth in the Basel Accords require that institutions maintain a certain amount of capital relative to the amount of risk-weighted assets (RWA) they have. Conservative investments such a treasury notes have a risk weighting of zero, while corporate bonds have a weighting of .20, and so forth. The exact weighting system is laid out in Basel agreements. The system is designed to reveal a bank’s level of exposure to potential losses, and the capital requirements are there to balance out the risks and to protect the global economy from a meltdown in the financial system. Continue reading...
Deposits are cash, checks, and electronic transfers that banking customers put into their personal or corporate bank accounts. Deposits will increase the balance, or pay off a debt, within a bank account. Deposits may not show up on an account balance until they have cleared from the institution or account from which the check is written or the electronic transfer was requested. The types of accounts that can receive bank deposits include but are not limited to checking, savings, and money market accounts. Bank Certificates of Deposit (CDs) can be purchased with an initial deposit that satisfied minimum amount. Deposits are considered liabilities on the balance sheet of the bank, since they are obligated to pay that money out when a customer requests it. Continue reading...
The truest definition of a Bank Draft is a check written with the certification of a customer’s bank. Bank Drafts are checks also known as Bank Checks and Cashier’s Checks. They have already been cleared at the writing institution and they provide an extra endorsement that the payment is good. Regular personal checks do not need to be co-signed or verified before they are used as payment, whether or not there is enough money in an account to cover it. Continue reading...
Bank Credit is the amount of loaned capital that an individual or business is capable of getting from a bank at a given time. This amount will be based on a series of evaluative metrics such as the total amount of assets an individual has, home equity, income, liquid net worth, work history, credit rating, and so forth. An individual can only borrow so much at a time, and, using these variables, a banker can essentially estimate how much credit could be extended that a given individual at that time. Continue reading...
A Real Estate Investment Trust (REIT) is a pooled investment with a high dividend yield that invests in real estate. REITs give investors an opportunity for participation and diversification in real estate investments, while also offering much higher degrees of liquidity and lower buy-in amounts than can be found in other real estate investments. A REIT operates much like a mutual fund, and would technically be taxable as a corporation if it weren't for its REIT status. Continue reading...
Hedge funds are sometimes the highest-earning investment vehicles, and sometimes they do that much worse than everything else. They have a high buy-in, low transparency, and limited liquidity. There are also other advantages and disadvantages worth mentioning. A good hedge fund can provide you with an excellent diversification of your investable assets and give you exposure to the best and brightest money managers in the world. Continue reading...