Capital Markets Syllabus

Yiorgos Allayannis

Office: FOB 184
(804) 924-3434
email: allayannisy@darden.gbus.virginia.edu

Capital Markets (GBUS 849)

This course provides an overview of the institutions, products, and processes by which capital is directed from savers to borrowers. The aforementioned represent the capital market; the smooth functioning of the capital market has much to say about the growth and efficiency of an economy. In this course we are going to focus on several themes related to the capital market: its economic role, financial innovation, and risk. In addition, we will look at a variety of sectors within the market: treasuries, preferred equity, corporates, swaps, and global equities.

The capital market is by its nature quite complex. Accordingly, a short survey course of this type cannot be an exhaustive treatment but it will provide a base framework for understanding capital market relationships. Moreover, many of the issues raised in this course will build upon discussions in BPE, Valuation, Fixed Income and Portfolio Management.

Textbook

Capital Markets: Institutions and Instruments, Frank J. Fabozzi and Franco Modigliani.

Grading

Class Participation 50%

Final Exam 50%

Course Objective

At the conclusion of this course, students should feel comfortable in their ability to analyze and discuss current conditions in the Capital Markets. That includes an understanding of the factors influencing interest rates, the flow of funds in the economy, and the trend towards integrated global markets. In addition, students should understand the changes that have occurred in the past 25 years and the key forces that have led to those changes.

CAPITAL MARKETS DAILY ASSIGNMENTS

Class#	Date	Topic	Case and Readings
1.	10/21	Introduction and Flow of Funds	Federal Reserve Data FM, Chapter 1
2.	10/21	Federal Reserve Treasury Market and Auction	Federal Reserve Data Salomon and the Treasury Securities Auction (9-292-114) as a background reading FM, Chapter 20
3.	10/27	Money Market Instruments	ARPPS: Adjustable Rate Perpetual Preferred Stock (9-284-096) FM, Chapter 19

4.	10/28	Money Market Instruments	MMP: Money Market Preferred Stock (9-285-112)
5.	11/03	High Yield Securities	Metromedia (9-286-044) FM, Chapter 21 Additional Readings (Reserved in Library) "Risk and Return Characteristics of Lower Grade Bonds, 1977 - 1987" "Junk Bonds: It's Too Soon to Tell."
6.	11/04	Medium Term Notes	RJR NabiscoBMedium Term Note Program (UVA-F-1057) FM, Chapter 22
7.	11/10	Mortgage Backed Securities	Travelers Mortgage Securities CMO (9-286-061) FM Chapters 24, 26
8.	11/11	Asset Backed Securities	American Express TRS Charge Card Receivables (9-293-120) FM, Chapter 27
9.	11/17	Invited Speaker: Dr. Ken Dunn
10.	11/18	Eurodollar Market	Note on the Eurodollar Debt Market (9-286-063) Coca-Cola Harmless Warrants (9-295-007)
11.	12/01	Eurodollar Market	Citicorp (1985) (9-286-053)

12.	12/02	Risk Management	American Barrick Resources Corp.: Managing Gold Price Risk (9-293-128) Additional Readings Managing Risks The Trajectory of Corporate Financial Risk Management
13.	12/08	Interest Rate Swaps	B.F. Goodrich-Rabobank (9-284-080) FM, Chapter 29
14.	12/09	International Equity	British Telecommunications (9-286-105)
15.	12/10	Emerging Markets	Chile and the Tequila Effect (UVA-F-1113)

CAPITAL MARKETS

Class Assignments

Class 1, Oct. 20

Reading:	Federal Reserve Data, FM, Chapter 1
Questions:	1. What is the role of Capital Markets? 2. What changes have occurred in the flow of funds between 1970 and 1995? (Examine differences across sectors/instruments). What are the impacts of those changes?

Class 2, Oct. 21

Reading:	Federal Reserve Data / Salomon and the Treasury Securities Auction (9-292-114) / FM Chapter 20
Questions:	1.What role does a primary dealer play in the Treasury market? Why does a firm want to be a primary dealer? 2. How do firms prepare for an auction?

Class 3, Oct. 27

Case: ARPPS: Adjustable Rate Perpetual Preferred Stock (9-284-096)

Reading: FM, Chapter 19

Questions: 1. What criteria would you use to determine the class of most likely investors in an ARPPS security?

2. What sales pitch would you make to them?
3. Who's likely to issue ARPPS?

4. How are ARPPS priced? How are the tax benefits divided between issuers and investors?

Class 4, Oct. 28

Case: MMP: Money Market Preferred Stock (9-285-112)

Questions: 1. What floating rate preferred innovations followed ARPPS?
2. What should Mr. Tennant bid for the American Express MMP? Why?

3. If your bid is unsuccessful, what will you buy?

Class 5, Nov. 03

Case: Metromedia (9-286-044)

Reading:
Additional Readings: FM, Chapter 21
"Risk and Return Characteristics of Lower Grade Bonds, (Reserved in Library) 1977 - 1987."
"Junk Bonds: It's Too Soon to Tell."

Questions:
1. Why does Kluge want to issue the debt?

2. Who are likely buyers of the various instruments?

3. What is the basis for underwriting debt that even the prospectus suggests is highly speculative?

Class 6, Nov. 04

Case: RJR Nabisco Medium-Term Note Program: An Evolving Debt Instrument For An Evolving Credit (UVA-F-1057)

Reading: FM, Chapter 22

Questions:
1. What role does the MTN play in the capital market? Who are likely issuers and investors?

2. How does the issuance of MTNs fit into RJR Nabisco's recapitalization?

3. What factors should be used to determine the rating and valuation of the proposed security?

Class 7, Nov. 10

Case: Travelers Mortgage Securities CMO (9-286-061)

Reading: FM, Chapter 24,26

Questions:
1. What is a GNMA? Why are prepayment assumptions important? How would you price/model them?

2. Why did Travelers trade out of GNMA's?

3. Why did Travelers act as both issuer and investor in this transaction? What alternative did they have?

4. Evaluate the pricing/trading behavior of each CMO class offered? What investors do you think purchased each CMO bond class?

5. What are the implications of increasing CMO issuance for the GNMA market? For the primary residential

Class 8, Nov. 11

Case: American Express TRS Change Card Receivables (9-293-120)

Reading: FM, Chapter 27

Assignment: Prepare a memo recommending a course of action for TRS.

Class 9, Nov. 17

Invited Speaker: Dr. Ken Dunn

Class 10, Nov. 18

Case: Coca-Cola Harmless Warrants (9-295-007)

Reading: Note on the Eurodollar Debt Markets (9-286-063)

Questions: 1. What are the major differences between regular debt warrant and harmless debt warrant structures?
2. How much value is Coca-Cola capturing via the harmless warrant structure and what is its source?

Class 11, Dec. 01

Case: Citicorp (1985) (9-286-053)

Questions: 1.Why did the Eurodollar bond market develop?
2.Compare and contrast Eurodollar fixed rate bonds with Eurodollar FRNs:
A) Who are the issuers? Why? B) Who are the investors? Why?
3.What are the relative advantages and disadvantages of the various FRN structures being considered by Ancona?
4.What is Citicorp's all-in-cost on a semiannual basis for both the proposed 10-year fixed rate Eurodollar and U.S. domestic bond? What is the spread over Treasuries?
5. For Citicorp, what are the current advantages and disadvantages of:
A) Fixed versus floating debt? B) Domestic versus Eurodollar debt?
6. If Citicorp chooses an FRN, how would you structure it? Be specific regarding size, maturity, coupon formulae, and special features.

Class 12, Dec. 02

Case: American Barrick Resources Corporation: Managing Gold Price Risk (9-293-128)

Additional Readings: "Managing Risks" "The Trajectory of Corporate Financial Risk Management"

Questions: 1. How sensitive are ABK's earnings and stock price without a hedging program?
2.What is the intent of the ABX hedging program? How should a gold company manage price risk? What are valid reasons for doing so?
3.How can we tell if risk management creates value for shareholders?

Class 13, Dec 08

Case: B.F. Goodrich-Rabobank (9-284-080)

Reading: FM, Chapter 29

Questions:
1. Why do Goodrich and Rabobank want to enter the swap?

2. What are the risks to the counter parties?

3. What is the role of the intermediary and what risks does it bear?

Class 14, Dec. 9

Case: British Telecommunication (9-286-105)

Questions:
1. How should U.S. investors value foreign equities?

2. How do equity underwriting risks vary across markets?

3. Should the British public and government be happy with the underwriting?

4. What are the implications of deregulation of foreign equity markets?

Class 15, Dec. 10

Case: Chile and the Tequila Effect (UVA-F-1113)

Questions: 1. Is Chile different from Argentina, Brazil, and Mexico? How?
2.What role has privatization of the Social Security System played in Chile?

Case:	American Express TRS Change Card Receivables (9-293-120)
Reading:	FM, Chapter 27
Assignment:	Prepare a memo recommending a course of action for TRS.

Case:	Coca-Cola Harmless Warrants (9-295-007)
Reading:	Note on the Eurodollar Debt Markets (9-286-063)
Questions:	1. What are the major differences between regular debt warrant and harmless debt warrant structures? 2. How much value is Coca-Cola capturing via the harmless warrant structure and what is its source?

Case:	American Barrick Resources Corporation: Managing Gold Price Risk (9-293-128)
Additional Readings:	"Managing Risks" "The Trajectory of Corporate Financial Risk Management"
Questions:	1. How sensitive are ABK's earnings and stock price without a hedging program? 2.What is the intent of the ABX hedging program? How should a gold company manage price risk? What are valid reasons for doing so? 3.How can we tell if risk management creates value for shareholders?