Investment Banking
Investment bankers function as intermediaries in financial
transactions. They are experienced in carrying out projects that, for most
companies, take place very rarely, but are critically important.
The role of the Investment Bank:
Investment banks provide four primary types of services:
v
raising capital
v
advising in mergers and acquisitions
v
executing securities sales and trading
v
performing general advisory services
Most of the major Wall Street firms are active in each of these
categories. Smaller investment banks may specialize in two or three of these
categories.
Raising Capital
An investment bank can assist a firm in raising funds to achieve
a variety of objectives, such as to acquire another company, reduce its debt
load, expand existing operations, or for specific project financing. Capital
can include some combination of debt, common equity, preferred equity, and hybrid securities such as convertible
debt or debt with warrants. Although many people associate raising capital with
public stock offerings, a great deal of capital is actually raised through
private placements with institutions, specialized investment funds, and private
individuals. The investment bank will work with the client to structure the
transaction to meet specific objectives while being attractive to investors.
Mergers and Acquisitions
Investment banks often represent firms in mergers, acquisitions,
and divestitures. Example projects include the acquisition of a specific firm,
the sale of a company or a subsidiary of the company, and assistance in
identifying, structuring, and executing a merger or joint venture. In each case,
the investment bank should provide a thorough analysis of the entity bought or
sold, as well as a valuation range and recommended structure.
Sales and Trading
These services are primarily relevant only to publicly traded
firms, or firms which plan to go public in the near future. Specific functions
include making a market in a stock, placing new offerings, and publishing
research reports.
General Advisory Services:
Advisory services include assignments such as strategic planning,
business valuations, assisting in financial restructurings, and providing an
opinion as to the fairness of a proposed transaction.
Typically, an investment
banking group nowadays provides world-wide some or all of the following
services, either in divisions of the bank or in associated companies within the
group:
Corporate
Finance and advisory work, normally in connection with new issues of securities
for raising finance, takeovers, mergers and acquisitions; Banking, for
governments, institutions and companies; Treasury dealing for corporate clients
in currencies, with financial engineering services to protect them from
interest and exchange rate fluctuations; Investment management, either for
corporate pension funds, charities, private clients, either via direct
investment for the more wealthy or via unit and investment trusts. In the
larger firms, the value of funds under management runs into many billions of
pounds; Securities trading, in equities, bonds or derivatives and offering
broking and distribution facilities.
Despite the variety of
these services and the consequent complexity of some of the groups, investment
banks are still small when compared with the large clearing or commercial
banks. Staff numbers of even the largest investment bank are in the low
thousands. Success in the investment banking business depends on the ability to
provide whatever financial services a client may require, and so the people
employed need particular qualities of flexibility, innovativeness and client
handling skills.
Investment Banking or, as
it was previously (and more accurately!) known, Corporate Finance,
is one of the most rewarding careers in the City of London
What is Investment Banking?
What is Investment Banking?
Investment Banking falls under two broad headings:
v the
provision of financial advice
v capital
raising.
Principal clients are companies, particularly publicly listed
companies, and governments. For companies, these services are primarily
directed towards raising shareholder value (that is, ensuring that the share
price fully reflects the value of the business); and the actions prescribed are
corporate actions (taking over another company, selling a division, returning
cash to shareholders by paying them a special dividend, etc). For governments,
these services are usually directed at executing government policy, for example
by selling off, or privatizing, government-held business or industries.
Provision of financial advice: As noted above, investment banking
advice relates to corporate actions rather than product or organizational
matters, such as product improvement, market analysis or management organization.
Nonetheless, an investment banker needs to have an understanding of all these
things because they, too, will have an impact on shareholder value.
Mergers and Acquisitions (M&A): The majority of financial
advice relates to M&A. The client company seeks to expand by acquiring
another business. There are many possible commercial reasons for this, such as:
v increasing
the range of products
v increasing
the business' geographical footprint
v complement
existing products
v integrating
vertically (i.e., acquire suppliers, further up the chain, or customers,
further down the chain)
v Protecting
a position (for example by preventing a competitor from acquiring the business
in question).
In practice, therefore, Investment Banking divisions tend to be
divided into industry sector teams, who can then familiarize themselves with
the principal players, economics and dynamics of the sector.
There are also many possible financial reasons for making an
acquisition, such as:
v raising
profitability, and therefore the share price
v increasing
in size - generally speaking, larger companies are more widely
v followed
and more widely invested in; again, likely to have a positive effect on the
share price
v financing
growth
v improving
quality of profits - the market likes predictable profit streams, and will
value these more highly
v shifting
the business towards sectors more favorably viewed by the market.
The Investment Bankers' role in these transactions is:
using their knowledge of
the industry sector, to help with the identification of potential targets which
meet commercial criteria such as those referred to above
using their knowledge of
the investment market, to advise on valuation, form of consideration (should
the sellers be paid in cash - which is likely to involve the buyer borrowing
the money - or in the buyer's shares - so that the seller ends up with a stake
in the buyer, or a blend of the two?), timing, tactics and structure
to coordinate the work of
the other advisers involved in the transaction - lawyers, who prepare the documentation
for the acquisition and help with the "due diligence" to be performed
on the business being acquired; accountants, who advise on the financial
reporting aspects of the transaction, and tax consequences; brokers, who advise
on shareholder aspects (how are the buyer's shareholders likely to view the
acquisition?) and how the market as a whole is likely to receive the
transaction; and PR consultants, who ensure that the transaction has a
favourable press.
Of course, the sellers or company being sold will also have
Investment Banking advisers, who provide advice on the other side of the table.
Generally, the Investment Bank is the first adviser to be
retained in respect of the deal - indeed it is often they who suggest it - so
they need more than a working knowledge of the specialist areas covered by the
other advisers.
Privatisation work is similar, except that the seller in this
case is a government, which is likely to have different, ie political, motives
for completing the transaction; although the commercial case must also be made.
General financial advice:
Investment Banking also involves providing general financial
advice on a range of issues, such as funding structure (perhaps the company is
too indebted, and should issue shares to raise more money; or does it have too
much cash on its balance sheet, just sitting there earning interest, so that it
should consider paying a large dividend to its shareholders or buying back some
if its own shares?).
Capital raising:
If a company is to grow, it has to invest and, often, that
capital comes from external sources. This can be in the form of either
"equity", when the company issues more shares to investors, who buy
them for cash; or debt, either from banks or - more usually nowadays - directly
from investors. Investors may be either institutional (pension funds and the
like) or "retail" (individuals).
Investment Banks advise on the raising of capital - in what form,
how much, from whom, timing - and may also charge a fee for arranging the
financing or for "underwriting" (guaranteeing to take up any
securities that are unsold in the market, so that the issuer knows for sure how
much cash it is going to raise and can plan accordingly).
Investment Banks are not usually very hierarchical - you are likely to find yourself being given a lot of responsibility very early on. But there is also a great deal of research and analysis to do, writing papers which provide the senior bankers with the information in which to base their advice. You will also be called upon to do lots of financial modelling: valuing companies and businesses, and investigating the likely effect on a company of an acquisition or disposal. This will require long hours and flexibility, as you are required to produce detailed analyses at short notice; and strong team-working skills.
As referred to above, Investment Bankers need not only to be skilled in their own demanding disciplines but also, for the early stages of a deal, to understand the specialist areas covered by other advisers. So there is a very steep learning curve to be climbed before you can start to give advice on your own account.
Finally, it is important that you are interested in the business of investment banking - takeovers, mergers, capital flows, factors influencing investment sentiment and economics.
If you are confused about what an Investment Bank actually does
then chances are you are not alone. Jargon can make investment banking appear
impenetrable to graduates new to the industry. Written by grads, for grads,
this article aims to comprehensively but simply explain it – with some
realistic views of what different functions would be like to work in.
Global Corporate Finance:
This part of the bank is
responsible for advising corporate clients (eg. Hilton or BP) on their forthcoming
strategy. As well as organising refinancing (a rights issue or bond issue) or
financing for specific projects it helps the companies in the negotiation
processes associated with buying or selling parts of the business.
As an analyst your job is to do the preliminary work so the presentations are slick and cover the appropriate issues. It’s a lot of work ‘running a book’ and ensuring its word perfect and more importantly number perfect, but when you are mandated to advise or when the deal comes to fruition there’s enormous satisfaction.
As an analyst your job is to do the preliminary work so the presentations are slick and cover the appropriate issues. It’s a lot of work ‘running a book’ and ensuring its word perfect and more importantly number perfect, but when you are mandated to advise or when the deal comes to fruition there’s enormous satisfaction.
Global Equities:
Global Equities can be divided into two parts, Cash, (the
physical shares) and Derivatives (contracts between two parties to buy or sell
the underling share at a fixed price by a fixed date). The Global Equities
“Cash” business is like a brokerage house, buying and selling shares on behalf
of our clients. Derivatives does basically the same thing, but rather than
trade the shares themselves, they trade the option to buy or sell shares at a
future date.
The best way to understand the business is to understand the
roles within it. Analysts are company researchers who examine the fundamentals
of businesses within an industry sector and build valuation models to aid in
investment decisions. One of their most important roles is to write “broker
notes” on the companies they cover, which provides the foundation of the work
of the sales floor.
The sales force are the brokers, they use this research together
with their own knowledge and experience to take investment ideas to the
clients. A client will then phone their Deutsche Bank sales-trader, who will
take and manage the order. This is passed on to the trader who does the buying
and selling in the live market.
Global Markets :Global Markets encompasses many dramatically different but complementary functions The overall output of the combined businesses is far greater than if they were isolated from one-another. Here’s a run-down of some of the major areas within Deutsche Bank’s ‘Global Markets’ division:
Foreign Exchange (FX)
Over The Counter (OTC or Derivatives)
Commodities
Debt Capital Markets (DCM)
Emerging Markets (EM)
As for Equities, for each area there are researchers, sales, sales-traders, traders and structurers.
Asset Management
Deutsche Asset Management is an active fund management house investing on behalf of institutional clients and retail funds. They add value to their portfolios by stock selection (we don’t do tracker funds): investing in equities (shares), bonds (loans instruments), commercial property and absolute return strategies (hedge funds)
Technology and Operations
The technology and operations division is widely regarded as the engine of an investment-banking organisation. Its’ principal role is to govern the processes of clearance and settlement of the Bank’s trades.
Operations ensure the efficient, trouble-free and more importantly risk-free completion of these transactions through the different departments and IT systems.
Graduates are highly valued, generally you are only limited by the amount of responsibility you want. The potential work is extremely varied. Whether you are a budding technical expert or a business relationship manager there is something for everyone.
Controlling
Controlling plays a key role in providing divisional business areas and management with information to support business and strategic decisions, and upholds the integrity of the financial information. It plays a central role within the Bank – having close contact with Business Management, Front Office (traders, corporate financier’s etc), Operations and IT.
Controllings’ importance within the business environment has been highlighted in the wake of recent corporate scandals. The downfall of Barings Bank and more recently Enron and Worldcom were a direct result of poor controls over the business.
At Deutsche Bank within Controlling you will study for your CIMA qualification, becoming a qualified Chartered Management Accountant at the end of the programme. This qualification is highly respected and provides you with an excellent grounding for the business environment.
Investment
Life Cycle
Time span from
acquisition of an investment to final disposition. The best way to measure the Rate of Return from an investment is over its
life cycle. All relevant investment contributions, Cash Flows, and resale
proceeds are known.
Investment
Life Cycle
The time span from acquisition of an investment to final
disposition.
Example: The best way to measure the rate of return from an investment is over its life cycle. All relevant investment contributions, cash flows, and resale proceeds are known.
Arbitrage
Buying securities in one country/market and selling them in another.
Basis points
Representing a hundredth of a percent, a basis point is used to measure changes in interest rates.
Bear
An investor who believes the market will fall.
Big bang
Technically the day when minimum commissions were abolished on the Stock Exchange. Also a term used to cover the whole changes that took place in the City in the 1980s.
Bill of Exchange
A bill made out by one party addressed to another requiring the addressee to pay a fixed sum of money by a certain date. The bill is then traded on the money markets.
Blue-chip
A company included on the FTSE share index. See FTSE 100/250
Bonds
A long-term loan certificate issued by governments and organisations in order to raise capital. Investors who buy these receive a fixed amount of interest for the life of the bond, and get their principle back at the end of it. A bond issued by a foreign institution is known as a bulldog in theUK , a yankee in the USA ,
a samurai bond in Japan
Broker
Someone who earns commission for providing the link between buyers and sellers.
Bull
An investor who thinks the market or a specific security or industry will rise.
Call Option
The right to buy shares at an agreed price at a future date (See put option).
Capital Markets
The market on which financial institutions (as opposed to commodities) are bought and sold. Companies often raise money in the Capital Markets through issuing bonds (Debt Capital Markets) or shares (Equity Capital Markets).
Certificate of Deposit (CD)
A certificate given by a bank to a depositor that can be traded on the money market. The depositor is able to get high levels of interest by putting their money in the bank for a fixed term but can sell the CD to someone else to get their capital back at short notice.
Chinese Wall
A theoretical barrier within a securities firm, which is designed to prevent fraud. One part of the firm may not pass on price-sensitive information to another if it is against a client's interest. The process of matching, guaranteeing and registering transactions.
Clearing
The process of matching, guaranteeing and registering transactions.
Clearing House
An institution that practices clearing, significantly reducing the number of interbank payments.
Commodities
Tangible goods such as metals, oil, agricultural produce traded on the commodity markets (e.g. London Metal Exchange).
Convertible Bond
A bond that can be converted into shares in a company.
Coupon
The interest payment on a bond.
Delivery
The settlement of a futures contract.
Demerger
The process by which part or parts of a company split to become independent firms.
Derivatives
Collective noun for financial contracts between buyers and sellers of commodities and capital. Includes futures, options and swaps.
Dow Jones Index
TheUS
Equity
The risk-sharing part of capital.
Equities
Shares - certificates that represent a part of ownership in a corporation.
Eurocurrency
A currency held outside its country of origin, traded in the Euromarket.
Option Expiry
Date on which the right to an option expires.
Financial Instruments
Collective noun for established financial contracts (securities and derivatives).
Flotation
When a company changes from being privately to publicly owned, and its shares are offered on the Stock Exchange for the first time.
FOREX/FX
The foreign exchange market - the market which deals in foreign currency.
FTSE 100/250 Index
The Financial Times Stock Exchange Index of the 100/250 companies with the greatest market capitalisation on theUK
Futures
The contract between two parties to buy or sell a commodity, or security, at a fixed price at a fixed price date in the future.
Gearing
A company's debts relative to its equity capital. Usually expressed as a percentage. A company is said to be 'highly geared' if it has a high proportion of debt in its capital strucure.
Gilts. Gilt Edged Securities
Securities whose interest or capital is guaranteed by a government.
Hedge
Holding two contrary positions in two or more financial instruments in order to offset a loss in one by a gain in the other.
Insider dealing
The abuse of 'price-sensitive' information to make a profit; a criminal offence.
Junk bond
High risk, high yielding bonds.
Last trading day
The final on which trading is allowed in a futures contract.
Leveraged buy-out
Using debt in the form of junk bonds or bank loans to take over a company.
LIFFE
TheLondon UK
Liquidity
The ease with which a financial asset can be exchanged for good without the holder incurring financial loss. A currency like sterling is liquid; a life insurance policy is not.
Margin
The amount of money that must be deposited in a derivatives trade to provide protection for both he parties dealing.
Market capitalisation
The values of shares in a public company at a point in time. Calculated by the number of shares issued multiplied by their current market price.
Market maker
A firm or individual who sets a price at which they're willing to sell or buy stock, providing a stable price against which to judge any rise or fall.
OPEC
Organisation of Petroleum Exporting Countries, which tries to control the price and production of oil.
Options
Like a future, however, the purchaser pays a premium to gain the option (rather than the obligation) to complete the contract. Includes traded options, currency options and interest rate options. The contract can be the right to buy (a call option) or to sell (a put option) a set number of shares at a fixed price.
Premium
(1) The price of an option determined by traders on the Exchange float. (2) The difference between the issued price and the market price of a new security if it rises in value immediately after it is issued.
Portfolio
Collective term for the shares an investor or a fund owns.
Price/earning ratio
A figure indicating the investor confidence a company enjoys. This is calculated by the current share price divided by the most recent figure for the earning per share. The higher the figure, the more confident the investors.
Principal
An investor who buys or sells on their own account at their own risk as opposed to a broker acting on behalf of someone else.
Put option
The right to sell shares at an agreed price on a future date (see call option)
Rights issue
Selling new shares to existing shareholders to raise capital.
Securities
Collective noun for bonds, Gilts and shares.
Securitization
The replacement of conventional ways of raising finance (e.g. loans) by instruments like Euronotes; the process whereby untradable assets become tradable.
SEAQ
Stock Exchange Automated Quotation System - on - screen for Stock Exchange members which allows them to advertise their share price.
SFA
The Securities and Futures Authority regulates those employed in these areas. They set mandatory examinations that must be passed by all employers.
Spot price
The current value of an asset.
Spread
The difference between the price at which a financial institution will buy a security and the price at which it will sell.
Stag
Someone who, predicting a new issue of shares will increase in value, buys them up to sell them immediately as they go on the market.
Stocks
(1) Another word for bonds (Fixed interest securities). (2) Used to mean the same as shares.
Stockbroker
Members of the Stock Exchange advising those buying/selling securities.
SEATS
Stock Exchange Automated Trading System. A system for trading less liquid securities.
Syndicated loan
A loan which several banks have clubbed together to make.
Synergy
The idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts.
Treasury
The section of a bank or business involved in the financial management of the organisations liquidity through dealing and borrowing.
Underlying instrument
The conventional stock or share on which a derivative is based.
Underwriting
The guarantee (which is offered by a bank in return for a fee) to buy or find the buyers for an entire issue of stocks and shares.
Buying securities in one country/market and selling them in another.
Basis points
Representing a hundredth of a percent, a basis point is used to measure changes in interest rates.
Bear
An investor who believes the market will fall.
Big bang
Technically the day when minimum commissions were abolished on the Stock Exchange. Also a term used to cover the whole changes that took place in the City in the 1980s.
Bill of Exchange
A bill made out by one party addressed to another requiring the addressee to pay a fixed sum of money by a certain date. The bill is then traded on the money markets.
Blue-chip
A company included on the FTSE share index. See FTSE 100/250
Bonds
A long-term loan certificate issued by governments and organisations in order to raise capital. Investors who buy these receive a fixed amount of interest for the life of the bond, and get their principle back at the end of it. A bond issued by a foreign institution is known as a bulldog in the
Broker
Someone who earns commission for providing the link between buyers and sellers.
Bull
An investor who thinks the market or a specific security or industry will rise.
Call Option
The right to buy shares at an agreed price at a future date (See put option).
Capital Markets
The market on which financial institutions (as opposed to commodities) are bought and sold. Companies often raise money in the Capital Markets through issuing bonds (Debt Capital Markets) or shares (Equity Capital Markets).
Certificate of Deposit (CD)
A certificate given by a bank to a depositor that can be traded on the money market. The depositor is able to get high levels of interest by putting their money in the bank for a fixed term but can sell the CD to someone else to get their capital back at short notice.
Chinese Wall
A theoretical barrier within a securities firm, which is designed to prevent fraud. One part of the firm may not pass on price-sensitive information to another if it is against a client's interest. The process of matching, guaranteeing and registering transactions.
Clearing
The process of matching, guaranteeing and registering transactions.
Clearing House
An institution that practices clearing, significantly reducing the number of interbank payments.
Commodities
Tangible goods such as metals, oil, agricultural produce traded on the commodity markets (e.g. London Metal Exchange).
Convertible Bond
A bond that can be converted into shares in a company.
Coupon
The interest payment on a bond.
Delivery
The settlement of a futures contract.
Demerger
The process by which part or parts of a company split to become independent firms.
Derivatives
Collective noun for financial contracts between buyers and sellers of commodities and capital. Includes futures, options and swaps.
Dow Jones Index
The
Equity
The risk-sharing part of capital.
Equities
Shares - certificates that represent a part of ownership in a corporation.
Eurocurrency
A currency held outside its country of origin, traded in the Euromarket.
Option Expiry
Date on which the right to an option expires.
Financial Instruments
Collective noun for established financial contracts (securities and derivatives).
Flotation
When a company changes from being privately to publicly owned, and its shares are offered on the Stock Exchange for the first time.
FOREX/FX
The foreign exchange market - the market which deals in foreign currency.
FTSE 100/250 Index
The Financial Times Stock Exchange Index of the 100/250 companies with the greatest market capitalisation on the
Futures
The contract between two parties to buy or sell a commodity, or security, at a fixed price at a fixed price date in the future.
Gearing
A company's debts relative to its equity capital. Usually expressed as a percentage. A company is said to be 'highly geared' if it has a high proportion of debt in its capital strucure.
Gilts. Gilt Edged Securities
Securities whose interest or capital is guaranteed by a government.
Hedge
Holding two contrary positions in two or more financial instruments in order to offset a loss in one by a gain in the other.
Insider dealing
The abuse of 'price-sensitive' information to make a profit; a criminal offence.
Junk bond
High risk, high yielding bonds.
Last trading day
The final on which trading is allowed in a futures contract.
Leveraged buy-out
Using debt in the form of junk bonds or bank loans to take over a company.
LIFFE
The
Liquidity
The ease with which a financial asset can be exchanged for good without the holder incurring financial loss. A currency like sterling is liquid; a life insurance policy is not.
Margin
The amount of money that must be deposited in a derivatives trade to provide protection for both he parties dealing.
Market capitalisation
The values of shares in a public company at a point in time. Calculated by the number of shares issued multiplied by their current market price.
Market maker
A firm or individual who sets a price at which they're willing to sell or buy stock, providing a stable price against which to judge any rise or fall.
OPEC
Organisation of Petroleum Exporting Countries, which tries to control the price and production of oil.
Options
Like a future, however, the purchaser pays a premium to gain the option (rather than the obligation) to complete the contract. Includes traded options, currency options and interest rate options. The contract can be the right to buy (a call option) or to sell (a put option) a set number of shares at a fixed price.
Premium
(1) The price of an option determined by traders on the Exchange float. (2) The difference between the issued price and the market price of a new security if it rises in value immediately after it is issued.
Portfolio
Collective term for the shares an investor or a fund owns.
Price/earning ratio
A figure indicating the investor confidence a company enjoys. This is calculated by the current share price divided by the most recent figure for the earning per share. The higher the figure, the more confident the investors.
Principal
An investor who buys or sells on their own account at their own risk as opposed to a broker acting on behalf of someone else.
Put option
The right to sell shares at an agreed price on a future date (see call option)
Rights issue
Selling new shares to existing shareholders to raise capital.
Securities
Collective noun for bonds, Gilts and shares.
Securitization
The replacement of conventional ways of raising finance (e.g. loans) by instruments like Euronotes; the process whereby untradable assets become tradable.
SEAQ
Stock Exchange Automated Quotation System - on - screen for Stock Exchange members which allows them to advertise their share price.
SFA
The Securities and Futures Authority regulates those employed in these areas. They set mandatory examinations that must be passed by all employers.
Spot price
The current value of an asset.
Spread
The difference between the price at which a financial institution will buy a security and the price at which it will sell.
Stag
Someone who, predicting a new issue of shares will increase in value, buys them up to sell them immediately as they go on the market.
Stocks
(1) Another word for bonds (Fixed interest securities). (2) Used to mean the same as shares.
Stockbroker
Members of the Stock Exchange advising those buying/selling securities.
SEATS
Stock Exchange Automated Trading System. A system for trading less liquid securities.
Syndicated loan
A loan which several banks have clubbed together to make.
Synergy
The idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts.
Treasury
The section of a bank or business involved in the financial management of the organisations liquidity through dealing and borrowing.
Underlying instrument
The conventional stock or share on which a derivative is based.
Underwriting
The guarantee (which is offered by a bank in return for a fee) to buy or find the buyers for an entire issue of stocks and shares.
Fixed Income Markets (investment banking)
06/01/2003 |
 |
In the financial industry, the term ‘fixed income (FI)’ is
commonly used to encompass a multitude of diverse disciplines. However,
common to most of these is a link to the issuance, structuring, restructuring
and repurchasing of debt instruments - or derivative products that derive
value from them.
Probably the most commonly known class of debt instrument is the bond. Bonds represent an entitlement of the bond holder to receive a set of predetermined cash flows from the bond issuer. Entities ranging from medium-sized high street shop chains to country governments issue (i.e. sell) bonds to fixed income investors in order to raise capital, perhaps to finance a large project or refinance existing debt. The primary market – Investment banks often act as intermediaries in this process, connecting those entities that wish to raise capital with investors willing to lend cash. Groups within fixed income that work directly in this process are: Origination, Syndication, and Securitization. The secondary market – Once a bond has been issued to investors, there may come a time when investors wishes to liquidate their assets. Investment banks provide a market place where investors can sell their bonds. The bank on the other hand may not wish to keep the bond and might sell it on to someone else who does (at a slightly higher price). This is one function of a trader. The derivatives market – Another scenario might arise in that an entity (a car loan company, for example) has issued a bond on which it is obliged to pay a fixed coupon of 5% to its investors. Perhaps due to changes in the consumer market, the loan company now finds itself earning its income predominantly as a short term variable rate (usually linked to the Bank of England base rate). In this case, the loan company might wish to match its assets with its liabilities – i.e. receive variable rate payments from its loan customers and pay variable rate coupons to its bond holders. The loan company cannot (easily) change the terms of its bond obligations, but it can contact an investment bank and enter into a derivative contract known as an interest rate swap. In this agreement, the investment bank agrees to pay the loan company the 5% coupon (which the loan company then passes on to the bond holders) in exchange for the floating rate payments. The investment bank has swapped the coupons. This is just one example of the many derivative products currently structured and traded by investment banks. Groups within FI that are involved in such derivatives transactions include derivatives marketers, structurers and traders. The three markets described above offer a broad range of opportunities that require a diverse range of skills. Origination involves sales and marketing roles that naturally entail a considerable amount of client interaction. Not only must a candidate have a comprehensive knowledge of financial products, he/she must also be able to convey that knowledge in a professional and convincing manner. There are also roles, especially in Research and Distribution, that are highly quantitative, often involving the construction of computational models. Research teams underpin the advice given to clients and the banks own traders. Good research calls for a grasp of global current affairs and politics as well as financial and economic matters. Proprietary traders trade as independent entities within the markets, backed by the bank’s own capital. Trading styles range from macro trading, based on geopolitical/economic data, to relative value trading that focuses more on the use of statistical models to exploit market inefficiencies or temporary movements of prices from long-term averages. Based on these models, and supported by good economic research, a trade might be executed based on the statistical probability of earning a return for a defined level of risk. While these various functions bring different challenges, abilities and disciplines into play, there are some common denominators in terms of skills required. Obviously a high degree of numeracy is essential throughout, along with an analytical mind, attention to detail and the ability to process complex information very swiftly. Stamina is vital too, as the hours can often be very long, and you need to be driven and focused to empower your own progress. But if you have what it takes, you will find the environment extraordinarily stimulating and engaging. The pace and complexity of investment banking attracts some of the sharpest minds one can ever hope to meet. This has certainly been my experience so far. Robert de Roeck currently works as a Relative Value Trader within ABN AMRO’s Financial Markets Business Unit. He graduated with an Honours degree in Physics from |
Investment banks, as opposed to commercial banks, assist public
and private corporations in raising funds in the Capital Markets (both equity
and debt), as well as in providing strategic advisory services for mergers,
acquisitions and other types of financial transactions
Indeed the original
purpose of an investment bank was to raise capital and advise on mergers and
acquisitions and other corporate financial strategies.
As banking firms have
been performing diversified activities, investment banks have come to fill a
variety of roles including underwriting and distributing new security issues,
offering brokerage services to public & institutional investors,
providing financial advice to corporate clients, especially on security
issues, providing advices on merger and acquisition deals, providing
financial security research to investors and corporate customers etc.
Investment banks have also moved into foreign currency exchange, private
banking, and bridge financing.
A key role of
investment banks is to advise companies in raising money or funds. There are
two ways of raising funds that investment bankers typically engage in:
raising funds through the capital markets and raising funds through private
placements. Investment bankers can raise funds in capital markets in two ways.
They can sell the company's equities in the stock market in an initial public
offering (IPO) or secondary offering, or they can give advices on debt issues
to the companies. Investment bankers also advise companies on private
placements, which mean purchase or sale of corporate securities by private
companies or individuals. Types of private placement transactions include
venture capital investments, strategic investments by companies, private
equity investments, private debt placements, acquisitions, divestitures, and
merchant banking.
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