Introduction to Investment

Banking: Investment Management

Process & Policy

Investment Banking & Security Analysis

Instructor: Sameen Ghani

Author: SAMEEN GHANI

 Definition

- Investment banks are financial intermediaries that match

economic entities that need capital with those that have capital
and hence enable both issuers and investors to raise or invest
capital at best possible (optimal/target) costs/benefits.
- Commercial bank refers to a financial institution that accepts
deposits, offers checking account services, makes various
loans, and offers financial products/trade finance and
transaction banking services to individuals, small, medium and
large corporate businesses.
- A full-service commercial bank (foreign/MNC banks and
large local banks) normally have specialized Investment
Banking, Corporate Banking, Institutional Banking Functions
within the Bank.
 Broad Map of the Investment Territory

• Investment is a sacrifice of current money for future benefits.

• Two key aspects of any investment are “time and risk”.
• The sacrifice (investment) takes place now and is certain, whereas
benefit is expected in the future and tends to be uncertain.
• Investments in government bonds, the time element is the dominant
attribute, whereas for investments in stocks (“equities”) both time and
risk are dominant attributes.
• Economic well being critically depends on how wisely or foolishly a
person invests.
 Financial Markets Types & Functions

Financial markets play a role in allocating resources in an economy by

performing three functions as under:

• Financial markets facilitate price discovery. Interaction among buyers

and sellers helps in establishing prices of financial assets.
• Financial markets provide liquidity to financial assets. Investors can
easily sell their financial assets. In absence of financial markets, the
motivation to hold financial asset will non-exist. Negotiability and
transferability through financial markets enable companies to raise long
term funds.
• Financial market considerably reduce the cost of transacting. Two
major costs associated with transacting are search and information
costs. Search encompass expenses incurred in advertising when one
wants to buy or sell and implicit costs such as effort and time to locate a
customer, whereas information cost refer to the costs incurred in
evaluating the investment merits of financial assets.
 Money Market & Capital Market
Securities
- Money markets are used for a short-term basis,
usually for assets up to one year.
- Capital markets are used for long-term assets,
which are any asset with maturity greater than
one year. Capital markets include the equity
(stock) market and debt (bond) market.
- Equity Capital Markets – primary & secondary
- Debt Capital Markets – primary & secondary
 Evaluating an investment attribute

Following attributes are relevant:

• Rate of return
• Risk
• Marketability
• Tax shelter
• Convenience
 Investment Banker’s Role

Primary & Secondary Markets:

– Financial Advisory
– Advisory Role in Initial Public Offering (IPO) /Offer for Sale (OFS)
– Fund Raising: in Debt & Equity Capital Markets
– Due Diligence
– Portfolio Management/Securities Markets
– M&A Advisory
– Debt Restructuring/Privatization
 Investment Management Process – Investment
Policy

Investment/portfolio management process may be broken down into

following steps:
1. Formulation of Investment Policy in tandem with specification of
investment objectives and constraints.
2. Choice of the asset-mix
3. Formulation of portfolio strategy
4. Selection of securities
5. Setting up a Portfolio
6. Review of Portfolio on an ongoing basis
7. Evaluation of Portfolio and making changes/revisions if needed.
Securities Market Line (SML)
 Securities Market Line (SML)

The security market line is an investment evaluation tool

derived from the CAPM – a model that describes risk-return
relationship for securities and is based on the assumption that:
a) investors need to be compensated for both the time value
of money
b) and the corresponding level of risk associated with any
investment, referred to as the risk premium or market risk
premium (MRP).
Capital Market Line (CML)
 Capital Market Line (CML)

- Capital market line is the graph of the required return and

risk (as measured by standard deviation) of a portfolio of a
risk-free asset and a basket of risky assets that offers the
best risk-return trade-off.
- It is a special case of capital allocation line that is tangent to
the efficient frontier.
- It shows various investor types – aggressive, moderate and
risk averse.
 How do various investment avenues
compare?

Summary of Evaluation of Various Investment Avenues

Marketability
Return Risk /liquidity Tax shelter Convenience
Current Yield Capital gain
Equity shares Low High High High High Very High
Corporate Non-covertible
bonds High Negligible Low Average Nil High
Corporate Convertible
bonds High high Low Average Nil High

Govt Bonds High Low/moderate risk free High Nil High

Equity schemes Low High High High High Very high
Bank deposits Low/moderate Nil low High Nil Very High
Real estatate Low High Low High High High
Gold & silver Low High Moderate High Nil High
Basic (normal) & Inverted Yield Curves
Flat & Humped Yield Curves
Parallel & non-parallel shifts in Yield Curves
Thank you