Functions of Investment Banks

Functions of Investment BanksA Critical Discussion of the Major FunctionsPerformed by Investment Banks.Glossary (Jump to)AbstractChapter 1 The Major Functions of Investment BanksSummaryBills of commutation integrated FinanceInvestment ManagementChapter 2 Conclusions and RecommendationsBibliographyAbstractInvestment banks evolved as a result of lucrative merchant centers located in the north of Italy, Belgium as healthfulspring as Holland from the 17th done 19th centuries. During that period Europes most influential merchant families moved to the United estate as it was becoming the merchant and banking center of the region. Said list included the Barings, Rothchilds, and Warburg families and their interests (Kuhn, Robert. 1990)1. Developments in the United States resulted in that country becoming the center of financial military action in the late 20th century and saw the rise of JP Morgan, Goldman Sachs Merrill Lynch and Morgan Staley joining the ranks of the older couchmen t powers (Carosso, 1970)2.Investment banking represents a broad spectrum of financial run that ar dispensed by various specialists in conjunction with global investment banks. The services perpetrateed by these institutions includes (Lott, 2001)3Underwriting,Distribution,The maintenance of markets in bonds, sh bes and securities issued by public entities and descentes, as strong asOther servicesIn contrast to the services provided by mercantile banks, where the principle functions ar to accept deposits and make loans to consumers and business on a short-term basis, investment banks engage in four either important(predicate) functions (Lott, 2001)4Assist in the arrangement for the provision of funds to corporations and governments through underwriting as well as distributing bleak securities issues,Maintenance of markets for securities through the trading and execution of orders for secondary market transactions,Administer advice with respect to the purchase, sale and issu ance of securities as well as other financial areas,The creation and management of varied investment vehicles.In addition to the foregoing, investment banks likely perform a number of other important transactions and functions that are the subject of discussion in this paper.Chapter 1 The Major Functions of Investment Banks1.1 SummaryInvestment banking consists of a broad array of financial transactions. many of the more familiar are (Lott, 2001)5Underwriting,Syndication,Corporate Demand CapitalTenders and,Investment banking functionsIt is this last area that shall for the basis for examination.Bills of Exchange (Williamson, 1988)6These are independent instruments of debt that carry the theme song of the customer (debtor). In summary, it is an order that directs a specific sum is to be paid to a specific individual. This instrument safeguards that a bill is accepted so that control is not lost of the item(s) involved. A bill of exchange contains a stated examine of payment that must be concluded on that date irrespective of any disputes concerning the item named. There are legal measures to prevent payment, termed non-honoring, which are subject to differing rules depending upon the country involved.Corporate Finance (Williamson, 1988)7This aspect of investment banking represents a specific finance area that deals with corporate financial decisions as well as the tools and analysis formulas and processes utilized to arrive at these decisions. It is divided into short-term and long-term techniques and decisions whereby the objective is to enhance corporate value through ensuring the return on capital is more than the cost of capital. The equation rests on a fusty application of risks.Corporate finance is related to managerial finance, although the latter is larger in scope as it entails financial techniques that are possible in all business forms, whether they are corporate or non-corporate.IPOs (efmoody, 2005)8Termed Initial Public Offerings, IPOs repre sent the beginning of a publicly listed political spelly and as such those investors whom are in position at this stage are poised to reap almost immediate gains if the stock rises on interruption day. Similarly, these same investors stand to lose m angiotensin-converting enzymey if the opening price drops substantially. During the last few years the offering prices do tended to average out as be overpriced. This is borne out by the fact that the closing price, on average, the day of opening generated an annual return of just 2%.In terms of profitability, IPOs generate large fees for the participating firms and represent the most profitable underwriting area. Fees generally average seven percent (7%). After the various splits between managing breedrs, brokerage firms, jurisprudence firms and staff the profit hovers in the 34% through 40% range. This service is a cornerstone in aiding firms to float securities needed to expand or underwrite operations and as such represents on e of the more important functions performed by investment banks.Rights Issues (Constantinides et al, 2002)9These are equity issues whereby shareholders of record cook the right to purchase new shares that have a fixed exercise price.Mergers Acquisitions (Allen et al, 2000)10Investment banks act in the capacity as advisors in merger and acquisition deals. In working with both the target(s) of acquisition as well as the acquirer(s), investment banks provide their information expertise to help arrive at the reservation price. They also obligate the potential for gains and the risks in the transaction. And slice investment banks have a vested interest in these deals, their pragmatism is an effective counter weight in maintaining a proportionateness between undervaluing and overvaluing. Operating under banking regulations, investment banks represent a sort of intermediary that engenders public trust in the legitimacy of the transaction and is a part of a system that represent check s and balances over these types of transactions.Commercial banks might have potential conflicts of interest in these types of deals, so even while they have latterly taken on this role, the majority of these transactions are still funneled through investment banks.Investment Management (Williamson, 1988)11As the term implies, investment management is also known as portfolio management as well as money management. It is a segment of investment analysis that examines the management of money relating to securities purchases as well as their sale.High Net Worth Individuals (Williamson, 1988)12Investment banking services for individuals of high remuneration worth has been a long standing feature for an elite conference whose banking investment needs exceed the capabilities of commercial banks and traditional specialists. The complex variable regarding the clients return targets and relative degrees of risk along with long as well as short-term requirements represent specialized analy sis. The resources of an investment bank are suited to meet the demanding requirements of these types of individuals as well as confidentiality. The extremely train variables comprising recommendations and placement in various instruments are crafted to fit an approved plan of action. Because high net worth individuals have access to their own channels of information, the demands of these types of clients in terms of sophistication requires the resources of a specialized institution.Corporations (Williamson, 1988)13The investment management of corporations entails handling a number of asset management areas. As is the case with high net worth individuals, it entails an extensive analysis of the goals and objectives desired as well as the cash availability requirements for specific periods of time. The preceding represents a valuable service as a result of the high level contacts and access to specialized information, opportunities and rates of return with moderate risk that investm ent banks can avail themselves of.Pension cash (Williamson, 1988)14These funds represent extremely large sums that require placement in investment avenues that contain high degrees of safety as well as face-off return rates in established parameters. The important nature of these retirement funds requires an institution to pay close attention to risk avoidance as well as any potential changes and shifts in the market that could potentially affect the money in the Fund.Mutual Funds (Williamson, 1988)15In terms of joint funds, there are literally hundreds of fund types to select from as a result of the classifications within this group. One particular type of fund which investment banks have an advantage over commercial banks is in hedge funds. These types of funds are unregulated and usually governed by unconventional strategies. Hedge funds trade in equities, money markets and bonds and offer yields as well as risks that exceed traditional long stock and bond methodologies. The s ecretive nature of these funds and the fact that they supply to institutions, corporations and high net worth individuals only is within the purview of investment banks.The mutual fund classifications contains a number of differing types, these are as followsObjective pointGrowthThis type is structured so that it appreciates in value over time by investing principally in the common stock of companies that have shown or are showing a high emergence potential.IncomeThese are structured to generate dividends on a regular basis as the priority, with growth in value as the secondary selection criteria.BalancedThese funds are a balance between growth and income funds thereby providing investors with dividend payouts while the fund appreciates in value as a result of the growth in the corporations selected.Market OrientedSpecializedThrough limiting holdings in one pains sector these sector growth funds place their emphasis on one industry classification. The preceding entails risks if that classification or segments of that classification perform poorly. The reverse is also true if the sector experiences growth.Bond FundsThese tend to be conservative investments, principally in debt securities, with the objective of providing income while preserving capital. The focus is similar to Income Funds, which is the payment of dividends.MunicipalThese types of bonds can be either short or long term and represent state and or local government issuances.CorporateThese funds are composed of bond issuances by corporations and are guaranteed by companies to pay out both interest as well as principle.Zero-couponThese are bonds that are sold to investors at a discount and payout only on the maturity of the face value. Because the investor purchased these at a discount, the face value represents the gain.InternationalThese are composed of the debt securities of corporations and governments located in other nations. As some countries pay higher rates, the gains can be interesting depending upon currency fluctuations and conversion rates.Convertible SecuritiesThese funds invest in securities (debt) that permit conversion of their bonds into stock. The objective is the preservation of capital yielding growth and income.Money MarketMoney market funds invest in the short-term obligations, debt, of both governments and corporations and are structured by and large to permit smaller investors to participate for amounts starting at approximately $500, depending upon the fund. Without the fund, direct confederation requires increments of $10,000. The pooled sums are then invested and managed.MultifundsThis type of fund invests in the effect of other types of mutual funds.All WeatherThese are designed to weather all types of business and economic phases.Emerging GrowthThese types of mutual funds invest in companies with high growth potential.Precious MetalsAs the name indicates, these are funds that take positions in various types of valuable metals.GreenA newer ca tegory within this classification, Green Funds select growth companies that have a record of universe responsive on environmental issues and adhere to policies within that arena.Chapter 2 ConclusionsInvestment banks serve a valuable purpose in financial and business markets through their handling of public offerings (IPOs) and private placements. These functions help corporations with their liquidity requirements and the issuance of securities. As investment banks can sell stock in an IPO as well as secondary offering and private placements they represent a centralized location that is able to fill the needs of corporations, governmental entities and high net worth individuals. The decades, and in some cases centuries of participation in high level finance has resulted in connections within finance arenas whereby investment banks maintain ties and associations at participation levels that are beyond commercial banks. In addition, this sector represents the top of the talent pool i n finance, thus the intelligence factor exceeds the personnel employed in commercial banking.Because investment banks are primarily paid on a success basis, their commitment to the deals is higher and so are the monetary rewards. Typically, the compensation in the industry ranges 50 through 60% of profits paid out to partners and employees. Investment banking executives, analysts, junior bankers and junior partners generally earn twice their commercial bank counterparts as their jobs entail making money for the firm as well as performance reviews for themselves. The high pressure and performance nature of these positions means only the brightest in their fields work in this sector, thus the reason for investment banks receiving the biggest and the best of deals in all of the service function areas mentioned above.The preceding emphasis on profits, earnings, fees and performance might seem like a focus on greed, however it is geared to bring out the best, through competition among fi rms, which benefits investors, the general public and the economies of the countries in which these firms operate.BibliographyAllen, Linda, Jagtiani, Julapa, Sauders, Anthony. The Role of Bank Advisors in Mergers and Acquisitions. Federal Reserve Bank of Chicago, Supervision and Regulation.Carosso, Vincent. 1970. Investment Banking in America, A History. Harvard University Press, Cambridge, MA. ISBN 0674465741Constantinides, George, Harris, Milton, Stulz, Rene. 2002. Investment Banking and Securities Issuance. Handbook of the Economics of Finance. ISBN 0444513639efmoody.com. 2005. IPOs. http//www.efmoody.com/investments/ipos.htmlKuhn, Robert. 1990. The library of Investment Banking. Dow-Jones Irwin, Homewood, IL. ISBN 1556232993Lott, Tom. 2001. Vault race Guide to Investment Banking. Vault. ISBN 1581311338Williamson, Peter. 1988. The Investment Banking Handbook. John Wiley Sons. ISBN 04718156241Footnotes1 Kuhn, Robert. 1990. The Library of Investment Banking. Dow-Jones Irwin, Hom ewood, IL. ISBN 15562329932 Carosso, Vincent. 1970. Investment Banking in America, A History. Harvard University Press, Cambridge, MA. ISBN 06744657413 Lott, Tom. 2001. Vault Career Guide to Investment Banking. Vault. ISBN 15813113384 Ibid5 Lott, Tom. 2001. Vault Career Guide to Investment Banking. Vault. ISBN 15813113386 Williamson, Peter. 1988. The Investment Banking Handbook. John Wiley Sons. ISBN 04718156247 Ibid8 efmoody.com. 2005. IPOs. http//www.efmoody.com/investments/ipos.html9 Constantinides, George, Harris, Milton, Stulz, Rene. 2002. Investment Banking and Securities Issuance. Handbook of the Economics of Finance. ISBN 044451363910 Allen, Linda, Jagtiani, Julapa, Sauders, Anthony. The Role of Bank Advisors in Mergers and Acquisitions. Federal Reserve Bank of Chicago, Supervision and Regulation.11 Williamson, Peter. 1988. The Investment Banking Handbook. John Wiley Sons. ISBN 047181562412 Ibid13 Ibid14 Williamson, Peter. 1988. The Investment Banking Handbook. John Wiley Sons. ISBN 047181562415 Ibid