Question

1. (a)   What is an efficient market? What are the consequences of market efficiency for the

behavior of stock prices? Does recent research support the idea that the stock market is efficient?

                       (b) Explain what is meant by a PRIVATE PLACEMENT. Who purchase privately placed corporate bonds and Why?

       (c)   Who are the principal BUYERS of corporate notes and bonds? Why are these groups of investors especially interested in acquiring these instruments?

                      (d)   Describe the important role that INVESTMENT BANKERS play in the functioning of the corporate bond market.

Answer 1

(a) The efficient market means the prices of the stock reflects all the available information. It is after taking into all the effects. It takes into consideration all the publicly and non public information to price the assets. There is no information which can affect the prices. The research report rarely shows that it is effective. If it is, then trading and strategies like short- selling would not have been possible. The arbitration strategy is common in the stock market and it is possible due to some hidden information. So, research rarely shows that the stock market is efficient.

(b) Private placement means, as the name suggest, selling the stocks to the particular group of investors and not public at large. They are predefined target investors who are sold some of the securities. The various investors like mutual fund, FII (Foreign institutional investor) and other fund houses etc purchase the privately placed corporate bonds.. They may help in reaching the minimum subscription and also they invest in large amounts.

(c) The corporate notes and bonds are both the debt instruments. They are issued by the company to help secure the funding activities. While bond is issued for the longer period and notes is issued for the shorter periods. The bonds are the longer term investment. The private parties invest into them as they see the growth potential in it. It is sometimes a profitable investment. The company may also comes in the agreement with these investors to support the issue. Sometimes, due to some regulations, the private investors have to invest a portion of their portfolio into this. While the notes are the short term investment. The return from it may be minimal. But , it is done so that current idle cash may be parked to generate some return.

(d) The investment bankers plays the bridge between the issuing company and the investors. They help the company in setting all the terms which is needed before issuance of the bond. They help in forecasting the level of the investors and they also help in finding the investor for the company. They also help in underwriting the issue of the bonds to help achieve the minimum level of the subscription. They can also act as custodian in some situation. So, they play various role in the corporate bond market according to the situation.