Two general functions
1. Assisting in obtaining funds for corporation, US government agencies, state and local government and foreign entities
  Government don’t need help because they issue treasury through auction
  Primary market (underwriting)
2. Act as brokers (trade securities for customers) and dealers (trade securities in their own account) is buying and selling
    securities.
  Secondary market (brokerage/dealing)
 

II
Nature of Business (Revenue Generating Activities)
1. Public offering (underwriting of securities)
(a) advising the issuer on the terms and the timing of the offering (design of securities)
(b) Buying the securities from the issuer (Underwriting)
(c) Distributing the issue to the public
      *** underwriter accepts the risk of selling the securities to investors at a lower cost
 
 

Methods
1. Firm commitment
  When the investment bank agrees to buy the securities from the issue at a set price
2. Best efforts
  Agrees to use its expertise to sell securities
  Does not guarantee a price to the issuer
  Does not buy the entire issue from the issuer
3. Illustration of underwriting
(a) Appointment of a lead manager by the borrower
(b) Lead manager invites group of banks and securities houses to form a managing group ?  co-lead and co-managers of the
      syndicate (selected on their reputation, distributor capabilities, and relationship with borrower)
  Managing group has the primary responsibility of underwriting the issue
  Why ? Share the risk (only reason)
(c) underwriter guarantee the sale of the issue taking securities for their own account if unable to sell them to investors
     (syndicate shares the risk of capital loss)

Underwriting syndicate

$100 Million issue	underwriting	fee
Lead Manager	20 Million	Management fee  Underwriting fee
5 co-managers	30 Million (6 Million each)	Underwriting fee
5 underwriters	50 Million (1 Million each)	Underwriting fee
Selling group		Selling commission

If total fee = 2%
The issuer will get $980 for every $1000 bond issue
100 Million X 2% = 2 Million
So, the issuer got $98 Million and the underwriters get $2 Million
 
 

2. Trading Securities
  Take a principal portion in secondary market transactions
  Market maker
  Revenue
         (a) bid (buying price)/ask (selling price) spread --- dealers buy low sell high
         (b) capital gain (appreciation of price of securities held in inventory)
         (c) Execution of trades for clients --- brokerage commission
3. Private placement vs. Public offering
  place securities with a limited number of institutional investors
  work with the issuer and potential investors on the design and pricing of the securities
4. Securitization of assets
  issuance of securities that have a pool of assets as collateral
  pooling loans onto standardized securities backed by those laws
  example : securitization of home mortgage loan
        (a) mortgage backed securities (MBS)
        (b) asset backed securities
              (i) collateral by automobile loans
              (ii) collateral by credit card receivables
5. Mergers and Acquisitions (M & A)
     Restoring and recapitalization of companies
     Reorganization if bankrupt and troubled companies
     LBO (leverage buyout)
     Takes over a firm using borrowed funds and private
6. Merchant Banking (United Kingdom)
     When an investor banking firm commits its own funds by either taking an equity interest or creditor position in companies
7. Trading and creation of derivative instrument
     Financial engineering
     Example : options, futures
8. Many management (mutual fund)
      subsidiaries that manage funds for investors