Addis Ababa University College of Business and Economics

School of Commerce

Department of Marketing Management

Commodity Derivative Marketing

Prepared by

1. Kirubel Lemma

Submitted to –Mulugeta (PHD)

June 2023
 BOND
Bond is a fixed income investment in which an investor loans money to an entity (corporate or
governmental) which borrows the funds for a defined period of time at a variable or fixed interest
rate. They are used by companies, municipality’s state and government to raise money to finance
variety of projects and activities.
Bonds are long-term debt securities that are issued by government agencies or corporations. The
issuer of a bond is obligated to pay interest (or coupon) payments periodically (such as annually
or semiannually) and the par value (principal) at maturity. An issuer must be able to show that its
future cash flows will be sufficient to enable it to make its coupon and principal payments to
bondholders.
According to the issuers bonds can be classified as
1. Treasury bonds
Treasury bonds are issued by the U.S. Treasury, federal agency bonds are issued by federal
agencies, municipal bonds are issued by state and local governments, and corporate bonds are
issued by corporations. Most bonds have maturities of between 10 and 30 years.
0 – 1 year 2 – 9 year 10 – 30 years
Money market instruments Intermediate term debt Bond

2. Federal agency bonds: are issued by federal agencies,

3. Municipal bonds: are issued by state and local governments, and
4. Corporate bonds: are issued by corporations.

Bonds are classified by the ownership structure as

1. Bearer bonds
Bearer bonds require the owner to clip coupons attached to the bonds and send them to the issuer
to receive coupon payments.
2. Registered bonds
Registered bonds require the issuer to maintain records of who owns the bond and automatically
send coupon payments to the owners.
 Bond Yields
A bond's yield is the return an investor expects to receive each year over its term to maturity. For the
investor who has purchased the bond, the bond yield is a summary of the overall return that accounts for
the remaining interest payments and principal they will receive, relative to the price of the bond.
The yield on a bond depends on whether it is viewed from the perspective of the issuer of the
bond, who is obligated to make payments on the bond until maturity, or from the perspective of
the investors who purchase the bond.
Yield from the Issuer’s Perspective - The issuer’s cost of financing with bonds is commonly
measured by the yield to maturity, which reflects the annualized yield that is paid by the issuer
over the life of the bond. The yield to maturity is the annualized discount rate that equates the
future coupon and principal payments to the initial proceeds received from the bond offering. It
is based on the assumption that coupon payments received can be reinvested at the same yield.
Yield from the Investor’s Perspective - An investor who invests in a bond when it is issued and
holds it until maturity will earn the yield to maturity. Yet many investors do not hold a bond to
maturity and therefore focus on their holding period return, or the return from their investment
over a particular holding period.

TREASURY AND FEDERAL AGENCY BONDS

Treasury bond Auctions
Treasury auctions are designed to minimize the cost of financing the national debt by promoting
broad, competitive bidding and liquid secondary market trading.
The Treasury obtains long-term funding through Treasury bond offerings, which are conducted
through periodic auctions.
 Treasury bond auctions are normally held in the middle of each quarter.
 Treasury announces its plans for an auction, including the date, the amount of funding
that it needs, and the maturity of the bonds to be issued.
 Financial institutions submit bids for their own accounts or for their clients at the time of
the auction,
Bids can be submitted on a competitive or a noncompetitive basis.
Competitive bids - specify a price that the bidder is willing to pay and a dollar amount of
securities to be purchased.
Noncompetitive bids - specify only dollar amountof securities to be purchased (subject to a
maximum limit).
Trading Treasury Bonds

 Bond dealers serve as intermediaries in the secondary market by matching up buyers and
sellers of Treasury bonds, and they also take positions in these bonds. About 2,000
brokers and dealers are registered to trade Treasury securities, but about 20 so-called
primary dealers dominate the trading. These dealers make the secondary market for the

Online Trading

 Investors can also buy bonds through the Treasury Direct program

(www.treasurydirect.gov).

 They can have the Treasury deduct their purchase from their bank account.
 They can also reinvest proceeds received when Treasury bonds mature into newly issued
Treasury bonds.

Online Quotations

 Treasury bond prices are accessible online at www.investinginbonds.com. This website

provides the spread between the bid and the ask (offer) prices for various maturities.
 Treasury bond yields are accessible online at www.federalreserve.gov/releases/H15/.
The yields are updated daily and are given for several different maturities

Stripped Treasury Bonds

Treasury strip are bonds that are sold at a discount to their face value. The investor does not
receive interest payments but is repaid the full face value when the bonds mature. That is, they
mature "at par."

The cash flows of Treasury bonds are commonly transformed (stripped) by securities firms into
separate securities. A Treasury bond that makes semiannual interest payments can be stripped
into several individual securities. One security would represent the payment of principal upon
maturity. Each of the other securities would represent payment of interest at the end of a
specified period. Consequently, investors could purchase stripped securities that fit their desired
investment horizon.

Inflation-Indexed Treasury Bonds

 Commonly referred to as TIPS (Treasury Inflation-Protected Securities)

 Are intended for investors who wish to ensure that the returns on their investments keep
up with the increase in prices over time.
 The coupon rate offered on TIPS is lower than the rate on typical Treasury bonds, but the
principal value is increased by the amount of the U.S. inflation rate (as measured by the
percentage increase in the consumer price index) every six months.

Savings Bonds

Savings bonds are debt securities issued by the U.S. Department of the Treasury to help pay for
the U.S. government's borrowing needs. U.S. savings bonds are considered one of the safest
investments because they are backed by the full faith and credit of the U.S. government.

Savings bonds have a 30-year maturity and do not have a secondary market. The Treasury does
allow savings bonds issued to be redeemed any time after a 12-month period, but there is a
penalty equal to the last three months of interest. Like other Treasury securities, the interest
income on savings bonds is not subject to state and local taxes but is subject to federal taxes. For
federal tax purposes, investors holding savings bonds can report the accumulated interest either
on an annual basis or not until bond redemption or maturity.

Federal Agency Bonds

Federal agency bonds are issued by federal agencies. The Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac)
issue bonds and use the proceeds to purchase mortgages in the secondary market. Thus they
channel funds into the mortgage market, thereby ensuring that there is sufficient financing for
homeowners who wish to obtain mortgages.
MUNICIPALBONDS

Municipal bonds are issued by states, cities, counties and other governmental entities to raise
money to build roads, schools and a host of other projects for the public good.

Like the federal government, state and local governments frequently spend more than the
revenues they receive. To finance the difference, they issue municipal bonds, most of which can
be classified as either general obligation bonds or revenue bonds.

Payments on general obligation bonds are supported by the municipal governments ability to
tax, whereas payments on revenue bonds must be generated by revenues of the project (toll way,
toll bridge, state college dormitory, etc.) for which the bonds were issued.

Revenue bonds are more common than general obligation bonds. Revenue bonds and general
obligation bonds typically promise semiannual interest payments. Common purchasers of these
bonds include financial and nonfinancial institutions as well as individuals. The minimum
denomination of municipal bonds is usually $5,000. A secondary market exists for them,
although it is less active than the one for Treasury bonds

Most municipal bonds contain a call provision, which allows the issuer to repurchase the bonds
at a specified price before the bonds mature. A municipality may exercise its option to
repurchase the bonds if interest rates decline substantially because it can then reissue bonds at
the lower interest rate and thus reduce its cost of financing

Credit Risk of Municipal Bonds

Both types of municipal bonds are subject to some degree of credit (default) risk. If a
municipality is unable to increase taxes, it could default on general obligation bonds. If it issues
revenue bonds and does not generate sufficient revenue, it could default on these bonds.

Municipal bonds have rarely defaulted, and some investors consider them to be safe because they
presume that any government agency in the U.S. can obtain funds to repay its loans. However,
some government agencies have serious budget deficits because of excessive spending, and may
not be able to repay their loans
 Insurance against Credit Risk of Municipal Bonds

 Some municipal bonds are insured to protect against default.

 The issuer pays for the protection so that it can issue the bond at a higher price, which
translates into a higher price paid by the investor. Thus investors indirectly bear the cost
of the insurance.
 There is still the possibility that the insurer will default on its obligation of insuring the
bonds. Thus if both the municipal bond and the bond insurer default, the investor will
incur the loss. For this reason, investors should know what company is insuring the bonds
and should assess its financial condition.

Variable-Rate Municipal Bonds

A variable-rate demand bond is a type of municipal bond (muni) with floating coupon payments
that are adjusted at specific intervals. Some variable-rate municipal bonds are convertible to a
fixed rate until maturity under specified conditions.

In general, variable-rate municipal bonds are desirable to investors who expect that interest rates
will rise. However, there is the risk that interest rates may decline over time, which would cause
the coupon payments to decline as well.

Tax Advantages of Municipal Bonds - One of the most attractive features of municipal bonds
is that the interest income is normally exempt from federal taxes. Second, the interest income
earned on bonds that are issued by a municipality within a particular state is normally exempt
from the income taxes (if any) of that state. Thus, investors who reside in states that impose
income taxes can reduce their taxes further.

Yields Offered on Municipal Bonds The yield offered by a municipal bond differs from the
yield on a Treasury bond with the same maturity for three reasons.

 First, the municipal bond must pay a risk premium to compensate for the possibility of
default risk.
 Second, the municipal bond must pay a slight premium to compensate for being less
liquid than Treasury bonds with the same maturity.
  Third, as mentioned previously, the income earned from a municipal bond is exempt
from federal taxes. This tax advantage of municipal bonds more than offsets their two
disadvantages and allows municipal bonds to offer a lower yield than Treasury bonds.
The yield on municipal securities is commonly 20-30 % less than the yield offered on
Treasury securities with similar maturities.

CORPORATE BONDS

 Corporate bonds are long-term debt securities issued by corporations that promise the
owner coupon payments (interest) on a semiannual basis.
 The interest paid by the corporation to investors is tax deductible to the corporation,
which reduces the cost of financing with bonds.
 Equity financing does not offer the same tax advantage because it does not involve
interest payments.

This is a major reason why many corporations rely heavily on bonds to finance their operations.
Nevertheless, the amount of funds a corporation can obtain by issuing bonds is limited by its
ability to make the coupon payments.

Corporate Bond Offerings - Corporate bonds can be placed with investors through a public
offering or a private placement.

Public Offering - Corporations commonly issue bonds through a public offering. A corporation
that plans to issue bonds hires a securities firm to underwrite the bonds. The underwriter assesses
market conditions and attempts to determine the price at which the corporation’s bonds can be
sold and the appropriate size (amount) of the offering. The goal is to price the bonds high enough
to satisfy the issuer but also low enough so that the entire bond offering can be placed

Private Placement - A private placement does not have to be registered with the SEC. Small
firms that borrow relatively small amounts of funds may consider private placements rather than
public offerings, since they may be able to find an institutional investor that will purchase the
entire offering.
Credit Risk of Corporate Bonds - Corporate bonds are subject to the risk of default, and the
yield paid by corporations that issue bonds contains a risk premium to reflect the credit risk. The
general level of defaults on corporate bonds is a function of economic conditions.

When the economy is strong, firms generate higher revenue and are better able to meet their
debt payments.

When the economy is weak, some firms may not generate sufficient revenue to cover their
operating and debt expenses and hence default on their bonds.

Bond Ratings as a Measure of Credit Risk - Corporate bonds that receive higher ratings can be
placed at higher prices (lower yields) because they are perceived to have lower credit risk.

A corporate bond’s rating may change over time if the issuer’s ability to repay the debt changes.
Many investors rely on the rating agencies to detect potential repayment problems on debt.
During the credit crisis, however, the rating agencies were slow to downgrade their ratings on
some debt securities that ultimately defaulted.

Junk Bonds - Corporate bonds that are perceived to have very high risk are referred to as junk
bonds. The primary investors in junk bonds are mutual funds, life insurance companies, and
pension funds. Some bond mutual funds invest only in bonds with high ratings, but there are
more than a hundred high-yield mutual funds that commonly invest in junk bonds. High-yield
mutual funds allow individual investors to invest in a diversified portfolio of junk bonds with a
small investment. Junk bonds offer high yields that contain a risk premium (spread) to
compensate investors for the high risk.

Secondary Market for Corporate Bonds

Corporate bonds have a secondary market, so investors who purchase them can sell them to other
investors if they prefer not to hold them until maturity. Corporate bonds are listed on an over-
the-counter market or on an exchange such as the American Stock Exchange (now part of NYSE
Euro next). More than a thousand bonds are listed on the New York Stock Exchange (NYSE).
Corporations whose stocks are listed on the exchange can list their bonds for free.
Dealer Role in Secondary Market

The secondary market is served by bond dealers, who can play a broker role by matching up
buyers and sellers. Bond dealers also have an inventory of bonds, so they can serve as the
counterparty in a bond transaction desired by an investor.

For example, if an investor wants to sell bonds that were previously issued by the Coca-Cola
Company, bond dealers may execute the deal either by matching the sellers with investors who
want to buy the bonds or by purchasing the bonds for their own inventories.

Liquidity in Secondary Market

Bonds issued by large, well-known corporations in large volume are liquid because they attract a
large number of buyers and sellers in the secondary market. Bonds issued by small corporations
in small volume are less liquid because there may be few buyers (or no buyers) for those bonds
in some periods. Thus investors who wish to sell these bonds in the secondary market may have
to accept a discounted price in order to attract buyers.

Trading Online Orders to buy and sell corporate bonds are increasingly being placed online.

For example, popular online bond brokerage websites are www.schwab.com and
http://us.etrade.com. The pricing of bonds is more transparent online because investors can easily
compare the bid and ask spreads among brokers. This transparency has encouraged some brokers
to narrow their spreads so that they do not lose business to competitors. Some online bond
brokerage services, such as Fidelity and Vanguard, now charge a commission instead of posting
a bid and ask spread, which ensures that investors can easily understand the fee structure.

Characteristics of Corporate Bonds

Corporate bonds can be described in terms of several characteristics.

 The bond indenture is a legal document specifying the rights and obligations of both the
issuing firm and the bondholders.
 It is comprehensive (normally several hundred pages) and is designed to address all
matters related to the bond issue (collateral, payment dates, default provisions, call
provisions, etc.).
  Bonds are not as standardized as stocks.

Sinking-Fund - A sinking fund is a fund containing money set aside or saved to pay off a debt
or bond. A company that issues debt will need to pay that debt off in the future, and the sinking
fund helps to soften the hardship of a large outlay of revenue. A sinking fund is established so
the company can contribute to the fund in the years leading up to the bond's maturity.

Protective Covenants Bond indentures normally place restrictions on the issuing firm that are
designed to protect bondholders from being exposed to increasing risk during the investment
period. These so-called protective covenants frequently limit the amount of dividends and
corporate officers’ salaries the firm can pay and also restrict the amount of additional debt the
firm can issue.

Call Provisions Most corporate bonds include a provision allowing the firm to call the bonds. A
call provision normally requires the firm to pay a price above par value when it calls its bonds.
The difference between the bond’s call price and par value is the call premium.

Call provisions have two principal uses. First, if market interest rates decline after a bond issue
has been sold, the firm might end up paying a higher rate of interest than the prevailing rate for a
long period of time. Under these circumstances, the firm may consider selling a new issue of
bonds with a lower interest rate and using the proceeds to retire the previous issue by calling the
old bonds.

Second, a call provision may be used to retire bonds as required by a sinking-fund provision.
Many bonds have two different call prices: a lower price for calling the bonds to meet sinking-
fund requirements and a higher price if the bonds are called for any other reason.

Bond Collateral Bonds can be classified according to whether they are secured by collateral and
by the nature of that collateral. Usually, the collateral is a mortgage on real property (land and
buildings). A first mortgage bond has first claim on the specified assets. A chattel mortgage bond
is secured by personal property.

Low- and Zero-Coupon Bonds Low-coupon bonds and zero-coupon bonds are long-term debt
securities that are issued at a deep discount from par value. Investors are taxed annually on the
amount of interest earned, even though much or all of the interest will not be received until
maturity. The amount of interest taxed is the amortized discount. (The gain at maturity is
prorated over the life of the bond.) Low- and zerocoupon corporate bonds are purchased mainly
for tax-exempt investment accounts (such as pension funds and individual retirement accounts).

Variable-Rate Bonds Variable-rate bonds (also called floating-rate bonds) are long-term debt
securities with a coupon rate that is periodically adjusted. Most of these bonds tie their coupon
rate to the London Interbank Offer Rate (LIBOR), the rate at which banks lend funds to each
other on an international basis. The rate is typically adjusted every three months.

Convertibility A convertible bond allows investors to exchange the bond for a stated number of
shares of the firm’s common stock. This conversion feature offers investors the potential for high
returns if the price of the firm’s common stock rises. Investors are therefore willing to accept a
lower rate of interest on these bonds, which allows the firm to obtain financing at a lower cost.

GLOBALIZATION OF BOND MARKETS

In recent years, financial institutions such as pension funds, insurance companies, and
commercial banks have often purchased foreign bonds. For example, the pension funds of
General Electric, United Technologies Corporation, and IBM frequently invest in foreign bonds
with the intention of achieving higher returns for their employees. Many public pension funds
also invest in foreign bonds for the same reason. Because of the frequent cross-border
investments in bonds, bond markets have become increasingly integrated among countries. In
addition, mutual funds containing U.S. securities are accessible to foreign investors.

Global Government Debt Markets

One of the most important global markets is the market for government debt. In general, bonds
issued by foreign governments (referred to as sovereign bonds) are attractive to investors
because of the government’s ability to meet debt obligations..

Eurobond Market

A Eurobond is a debt instrument that's denominated in a currency other than the home currency
of the country or market in which it is issued. Eurobonds are frequently grouped together by the
currency in which they are denominated, such as Eurodollar or Euro-yen bonds. Since
Eurobonds are issued in an external currency, they're often called external bonds. Eurobonds are
important because they help organizations raise capital while having the flexibility to issue them
in another currency. Issuance of Eurobonds is usually handled by an international syndicate of
financial institutions on behalf of the borrower, one of which may underwrite the bond, thus
guaranteeing the purchase of the entire issue

OTHER TYPES OF LONG-TERM DEBT SECURITIES

In recent years, other types of long-term debt securities have been created. Some of the more
popular types are:

1. Structured Notes

2. Risk of Structured Notes

3. Exchange-Traded Notes
 CHAPTER 10

Stock Offerings and Investor Monitoring

PRIVATE EQUITY

When a firm is created, its founders typically invest their own money in the business.The
founders may also invite some family or friends to invest equity in the business.This is referred
to as private equity because the business is privately held and the owners cannot sell their shares
to the public.

Young businesses use debt financing from financial institutions and are better able to obtain
loans if they have substantial equity invested. Over time, businesses commonly retain a large
portion of their earnings and reinvest it to support expansion. This serves as another means of
building equity in the firm.

Financing by Venture Capital Funds

Private firms that need a large equity investment but are not yet in a position to go public may
attempt to obtain funding from a venture capital (VC) fund. Such funds receive money from
wealthy investors and from pension funds that are willing to maintain the investment for a long-
term period, such as 5 or 10 years. These investors are not allowed to withdraw their money
before a specified deadline. Venture capital funds have participated in a number of businesses
that ultimately went public and became very successful, including Apple, Microsoft, and Oracle
Corporation.

Venture Capital Market

The venture capital market brings together the private businesses that need equity funding and
the VC funds that can provide funding. Oneway of doing this is through venture capital
conferences, where each business briefly makes its pitch as to why it will be successfulif it
receives equity funding.
Terms of a Venture Capital Deal

When a VC fund decides to invest in a business, it will negotiate the terms of its investment,
including the amount of funds it is willing to invest. It will also set out clear requirements that
the firm must meet, such as providing detailed periodic progress reports. When a VC fund
invests in a firm, the fund’s managers have an incentive to ensure that the business performs
well.

Exit Strategy of VC FundsWhen a VC fund typically plans to exit from its original investment
within about four to seven years. One common exit strategy is to sell its equity stake to the
public after the business engages in a public stock offering. Alternatively, the VC fund may cash
out if the company is acquired by another firm, since the acquirer will purchase the shares owned
by the VC fund. Thus, the VC fund commonly serves as a bridge for financing the business until
it either goes public or is acquired.

PUBLIC EQUITY

When a firm goes public, it issues stock in the primary market in exchange for cash. This
changes the firm’s ownership structure by increasing the number of owners. It changes the firm’s
capital structure by increasing the equity investment in the firm, which allows the firm to pay off
some of its debt. It also enables corporations to finance their growth.

STOCK OFFERINGS AND REPURCHASES

Even after a firm has gone public, it may issue more stock or repurchase some of the stock that it
previously issued.

Secondary Stock Offerings

A secondary stock offering is a new stock offering by a specific firm whose stock is already
publicly traded. Some firms have engaged in several secondary offerings to support their
expansion. A firm that wants to engage in a secondary stock offering must file the offering with
the SEC. It will likely hire a securities firm to advise on the number of shares it can sell, to help
develop the prospectus submitted to the SEC, and to place the new shares with investors.
Shelf Registration- Corporations can publicly place securities without the time lag often caused
by registering with the SEC. With this so-called shelf registration, a corporation can fulfill SEC
requirements as many as two years before issuing new securities. The registration statement
contains financing plans over the upcoming two years.

Stock Repurchases -Corporate managers have information about the firm’s future prospects that
is not known by the firm’s investors, knowledge that is often referred to as asymmetric
information. When corporate managers believe that their firm’s stock is undervalued, they can
use the firm’s excess cash to purchase a portion of its shares in the market at a relatively low
price based on their valuation of what the shares are really worth. Firms tend to repurchase some
of their shares when share prices are at very low levels.

STOCK EXCHANGES

Any shares of stock that have been issued as a result of an IPO or a secondary offering can be
traded by investors in the secondary market. In the United States, stock trading between investors
occurs on the organized stock exchanges and the over-the-counter (OTC) market.

Organized Exchanges

Each organized exchange has a trading floor where floor traders execute transactions in the
secondary market for their clients. Although there are several organized stock exchanges in the
United States, the New York Stock Exchange (NYSE) is by far the largest.

Listing Requirements

The New York Stock Exchange(NYSE) charges an initial fee to firms that wish to have their
stock listed. The fee depends on the size of the firm. Corporations must meet specific
requirements to have their stock listed on the NYSE, such as a minimum number of shares
outstanding and a minimum level of earnings, cash flow, and revenue over a recent period.

Over-the-Counter Market

Stocks not listed on the organized exchanges are traded in the over-the-counter (OTC) market.
Like the organized exchanges, the OTC market also facilitates secondary market transactions.
Unlike the organized exchanges, the OTC market does not have a trading floor. Instead, the buy
and sell orders are completed through a telecommunications network. Because there is no trading
floor, it is not necessary to buy a seat to trade on this exchange; however, it is necessary to
register with the SEC.

Nasdaq- Many stocks in the OTC market are served by the National Association of Securities
Dealers Automatic Quotations (Nasdaq), which is an electronic quotationsystem that provides
immediate price quotations. Firms that wish to have their prices quoted by the Nasdaq must meet
specific requirements on minimum assets, capital, and number of shareholders. More than 3,000
stocks trade on the Nasdaq. Although most stocks listed in this market are issued by relatively
small firms, stocks of some very large firms (e.g., Apple and Intel) are also traded there.

OTC Bulletin Board- The OTC Bulletin Board lists stocks that have a price below $1 per share,
which are sometimes referred to as penny stocks. More than 3,500 stocks are listed here. Many
of these stocks were once traded in the Nasdaq market but no longer meet that exchange’s
requirements. Penny stocks are less liquid than those traded on exchanges because there is an
extremely limited amount of trading. They are typically traded only by individual investors.
Institutional investors tend to focus on more liquid stocks that can be easily sold in the secondary
market at any time.

Pink Sheets- The OTC market has another segment, known as the “pink sheets,” where even
smaller stocks are traded. Like those on the OTC Bulletin Board, these stocks typically do not
satisfy the Nasdaq’s listing requirements. Financial data on them are very limited, if available at
all. Companies whose stocks are traded on the pink sheets market do not have to register with the
SEC. Some of the stocks have very little trading volume and may not be traded at all for several
weeks.

Stock Index Quotations

Stock indexes serve as performance indicators of specific stock exchanges or of particular

subsets of the market. The indexes allow investors to compare the performance of individual
stocks with more general market indicators. Some of the more closely monitored indexes are
identified below.
Dow Jones Industrial Average- The Dow Jones Industrial Average (DJIA) is a value-weighted
average of stock prices of 30 large U.S. firms. ExxonMobil, IBM, and the Coca-Cola Company
are among the stocks included in the index. Since the DJIA is based on only 30 large stocks, it is
not always an accurate indicator of the overall market or (especially) of smaller stocks.

Standard & Poor’s 500 The Standard & Poor’s (S&P) 500 index is a valueweighted index of
stock prices of 500 large U.S. firms. Because this index contains such a large number of stocks,
it is more representative of the U.S. stock market than the DJIA. However, because the S&P 500
index focuses on large stocks, it does not serve as a useful indicator for stock prices of smaller
firms.

New York Stock Exchange -Indexes The NYSE provides quotations on indexes that it has
created. The Composite Index is the average of all stocks traded on the NYSE. This is an
excellent indicator of the general performance of stocks traded on the NYSE. However, because
these stocks represent mostly large firms, the Composite Index is not an appropriate measure of
small stock performance. In addition to the Composite Index, the NYSE also provides indexes
for four sectors:

 Industrial

 Transportation

 Utility

 Financial

Nasdaq Stock Indexes-The National Association of Securities Dealers (NASD) provides

quotations on indexes of stocks traded on the Nasdaq. These indexes are useful indicators of
small stock performance because many small stocks are traded on that exchange.

MARKET FOR CORPORATE CONTROL

When corporate managers notice that another firm in the same industry has a low stock price as a
result of poor management, they may attempt to acquire that firm. They hope to purchase the
business at a low price and improve its management so that they can increase the value of the
business. In addition, the combination of the two firms may reduce redundancy in some
operations and allow for synergistic benefits.

Barriers to the Market for Corporate Control

 Antitakeover Amendments

 Poison Pills

 Golden Parachutes

GLOBALIZATION OF STOCK MARKETS

Stock markets are becoming globalized in the sense that barriers between countries have been
removed or reduced. Thus, firms in need of funds can tap foreign markets, and investors can
purchase foreign stocks. In recent years, many firms have obtained funds from foreign markets
through international stock offerings. This strategy may represent an effort by a firm to enhance
its global image. Another motive is that, because the issuing firm is tapping a larger pool of
potential investors, it can more easily place the entire issue of new stock.

Privatization

The governments of many countries have allowed privatization, or the sale of government-
owned firms to individuals. Some of these businesses are so large that the local stock markets
cannot digest the stock offerings. Consequently, investors from various countries have invested
in the privatized businesses.