Laclede Gas Company – still in operation as the Laclede Group, Inc., removed from the DJIA in 1899.
National Lead Company – now NL Industries, removed from the DJIA in 1916.
North American Company – electric utility holding company broken up by the SEC in 1946.
Tennessee Coal, Iron and Railroad Company – bought by U.S. Steel in 1907.
U.S. Leather Company – dissolved in 1952.
United States Rubber Company – changed its name to Uniroyal in 1961 - bought by Michelin in 1990
Current Dow Jones Companies
Company
Stock Symbol
Primary Group
3M Co.
MMM
Diversified Industrials
Alcoa Inc.
AA
Aluminum
American Express Co.
AXP
Consumer Finance
AT&T
T
Telecommunications
Bank of America
BAC
Banking
Boeing Co.
BA
Aerospace
Caterpillar Inc.
CAT
Commercial Vehicles & Trucks
Chevron
CVX
Integrated Oil and Gas
Cisco Systems
CSCO
Banks
Coca-Cola Co.
KO
Soft Drinks
E.I. DuPont de Nemours
DD
Commodity Chemicals
Exxon Mobil Corp.
XOM
Integrated Oil & Gas
General Electric Co.
GE
Diversified Industrials
Hewlett-Packard Co.
HPQ
Computer Hardware
Home Depot Inc.
HD
Home Improvement Retailers
Honeywell International Inc.
HON
Diversified Industrials
Intel Corp.
INTC
Semiconductors
International Business Machines Corp.
IBM
Computer Services
Johnson & Johnson
JNJ
Pharmaceuticals
JPMorgan Chase & Co.
JPM
Banks
UnitedHealth Group
UNH
Managed Healthcare
McDonald's Corp.
MCD
Restaurants & Bars
Merck & Co. Inc.
MRK
Pharmaceuticals
Microsoft Corp.
MSFT
Software
Pfizer Inc.
PFE
Pharmaceuticals
Procter & Gamble Co.
PG
Nondurable Household Products
Travelers Corp.
TRV
Insurance
United Technologies Corp.
UTX
Aerospace
Verizon Communications Inc.
VZ
Fixed Line Telecommunications
Wal-Mart Stores Inc.
WMT
Broadline Retailers
Walt Disney Co.
DIS
Broadcasting & Entertainment
Investment Banker
A financial specialist involved as an intermediary in the merchandising of securities; facilitates flow of savings from economic units that want to invest in those units that want to raise funds.
Functions of an Investment Banker
Underwriting
Distributing
Advising
Distribution Methods
Negotiated Purchase
Competitive Bid Purchase
Commission or Best Efforts Basis
Privileged Subscription
Direct Sales
Private Placements
Advantages
Speed
Reduced Flotation Costs
Financing Flexibility
Disadvantages
Interest Costs
Restrictive Covenants
Possible Future SEC Registration
Flotation Costs
Incurred by the firm raising the capital
Sensitive to the risk involved with successfully distributing a security
Types
Underwriters Spread
Issue Costs
Printing and Engraving
Legal Fees
Accounting Fees
Trustee Fees
Other
Market Regulation
Securities Act of 1933
Securities Exchange Act of 1934
Securities Acts Amendments of 1975
Securities Exchange Act of 1933
Securities Act of 1933 — Aims to provide potential investors with accurate, truthful disclosure about the firm and new securities being offered.
Securities Exchange Act of 1934
Created SEC to enforce federal securities laws
Major security exchanges must register with the SEC
Insider trading is regulated
Prohibits manipulative trading
SEC control over proxy procedures
Gives Board of Governors of Federal Reserve System responsibility for setting margin requirements
Securities Acts Amendments of 1975
Created a national market system (NMS)
SEC Rule 415 – Shelf Registration
Shelf Registration or Shelf Offering is a procedure for issuing new securities where the firm obtains a master registration statement approved by the SEC
Sarbanes-Oxley Act of 2002
In July 2002, Congress passed the Public Accounting and Reform and Investor Protection Act
The Act contains 11 titles which tighten significantly the latitude given corporate advisors who have access to or influence company decisions.
Sarbanes-Oxley Act of 2002 Key Elements
Public Company Accounting Oversight Board
Auditor Independence
Corporate Responsibility
Enhanced Financial Decisions
Analysts Conflicts of Interest
Commission Resources and Authority
Studies and Reports
Corporate and Criminal Fraud Accountability
White-Collar Crime Penalty Enhancements
Corporate Tax Returns
Corporate Fraud and Accountability
Rates of Return in Financial Markets
Opportunity Cost— Rate of return on next best investment alternative to the investor
Standard Deviation— Dispersion or variability around the mean, or average of the rate of return in the financial markets
Maturity Premium— Additional return required by investors in long-term securities to compensate them for greater risk of price fluctuations on those securities caused by interest rate changes
Liquidity Premium— Additional return required by investors in securities that cannot be quickly converted into cash at a reasonably predictable price.
Liquidity Premium— Additional return required by investors in securities that cannot be quickly converted into cash at a reasonably predictable price.
Real Return— Return earned above the rate of increase in the general price level for goods and services in the economy (the inflation rate)
Real Rate of Interest— Rate of increase in actual purchasing power—after adjusting for inflation
Rates of Return in Financial Markets
Interest Rate Determinants in a Nutshell
k = k* + IRP + DRP + MP + LP
where:
k = nominal or observed rate of interest on a specific fixed-income security
k* = real risk-free rate of interest on a fixed-income security that has no risk and in an economic environment of zero inflation. (US Treasury Securities)
IRP = the inflation-risk premium
DRP = the default-risk premium
MP = the maturity premium
LP = the liquidity premium
Term Structure of Interest Rates
The relationship between a debt security’s rate of return and the length of time until the debt matures.
Also called “Yield to Maturity”
Explained by:
Unbiased Expectations Theory
Liquidity Preference Theory
Market Segmentation Theory
Unbiased Expectations Theory
Term Structure is determined by an Investor’s expectations about future interest rates.
Liquidity Preference Theory
Investors require maturity premiums to compensate them for buying securities that expose them to the risks of fluctuating interest rates
Market Segmentation Theory
Legal restrictions and personal preferences limit choices for investors to certain ranges of maturities
