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Chapter 12 The Global Capital Market (Global Capital Market: bring…
Chapter 12 The Global Capital Market
Global Capital Market:
bring together investors and
borrowers
Who
markets makers
investors
borrowers
Attractions
Borrowers benefit
lowers
the cost of capital
Investors benefit
lowers the cost of capital
Growth
Advances in information technology
Deregulation by governments
Risks
can have a destabilizing effect on economies
Meaning for Managers:
created opportunities for firms
borrow or invest internationally
diversify their investments
and reduce risk
Capital markets are likely to continue
to integrate, providing more opportunities for business
Eurocurrency Market
What
currency banked outside its country of origin
the market is an important source of low-cost funds for international companies
Growth
the market began in the 1950s
In 1957, the market surged again after
changes in British laws
London became the leading center of the
Eurocurrency market
In the 1960s, the market grew once again
Arab members of OPEC accumulated
huge amounts of dollars
Attraction
it is not regulated by the
government
The spread between the Eurocurrency deposit and lending rates is
less than
the spread between the domestic deposit and lending rates
Drawbacks
there is a higher risk that bank
failure could cause depositors to lose funds
Companies borrowing Eurocurrencies can be
exposed to foreign exchange risk
Global Bond Market
What
Bonds are an important means of
financing for many companies
two types of international bonds
Foreign bonds
Eurobonds
Attraction
lacks regulatory interference
has less stringent disclosure requirements
than domestic bond markets
more favorable from a tax perspective
Global Equity Market:
allows firms to
List their stock on multiple exchanges
Raise funds by issuing debt or equity
around the world
Attract capital from international investors
Exchange Rates Affect the Cost of Capital
Adverse exchange rates can
increase
the cost
of foreign currency loans
attractive to borrow
foreign currencies, may be
less attractive
when exchange-rate risk is factored in
Volatile exchange rates can make what would otherwise be profitable investments, unprofitable