INVESTMENT BANKING
LESSON 1 INTRODUCTION
Books used include: Investment Banking (2nd edition) Beijing
Language and Culture University Press, 2013
Investment Banking for Dummies, Matthew Krantz, Robert
R. Johnson,Wiley & Sons, 2014
LESSON 1 INTRODUCTION

Like what we have already learned at a
basic level, all banking is moving
money from people who have it,
savers, lenders (investors) to those
who need it, borrowers, spenders
(issuers). However, investment
banking is much more than just
deposits and loans offered by the
commercial banks.
REVIEW – DISCUSSION ACTIVITY

Let’s do a little review from your last
course with me. In your groups, discuss
these questions.
1. What are the 2 main types of Financial
Intermediaries?
2. What are their primary responsibilities?
3. What separated them and what brought
them back together? What are some of the
reasons the two types of banks were
separated in the United States years ago?
LESSON 1 – TOPICS FOR TODAY
1. SIMPLY, WHAT IS INVESTMENT BANKING (IB)?
2. WHAT ARE THE ACTIVITIES OF INVESTMENT
BANKS?
3. EMPLOYMENT BY JOB FUNCTION
4. IB SALARIES
1. WHAT IS INVESTMENT BANKING & WHAT
ARE THE ACTIVITIES OF INVESTMENT BANKS?

Simply, investment banking is what
investment banks do?

An investment bank is a financial
intermediary or institution that helps
corporations raise funds.

How do they do this?
2. WHAT IS INVESTMENT BANKING & WHAT
ARE THE ACTIVITIES OF INVESTMENT BANKS?

Major Functions of Investment Banks
A. Raising Capital and Security Underwriting
B. Financial Advisory (M & A)
C. Corporate Lending
D. Sales & Trading
E. Brokerage Services
F. Research
G. Investments
A. RAISING CAPITAL AND SECURITY
UNDERWRITING 保险业 Bǎoxiǎn yè
Investment banks are middlemen between
companies that want to start or grow a
business and the buying public. Between
issuers and investors. Investment banks
are the financial intermediaries that these
companies want to hire.
Simply, they generate money from
investors by selling shares of stock or debt
A. RAISING CAPITAL AND SECURITY
UNDERWRITING 保险业 Bǎoxiǎn yè
The investment bank will determine the
value and the risk level of the business in
order to price, underwrite and sell
securities through the primary or
secondary market.
QUESTIONS FOR GROUP DISCUSSION
4. What is underwriting?
5. What is the difference between the
primary and secondary market?
6. What is an IPO? P. 57 CH 4 Can you give
an example of one?
WHAT IS UNDERWRITING?
The process by which investment bankers raise
investment capital from investors on behalf of
corporations and governments that are issuing
securities (both equity and debt).
 Explanation: The word "underwriter" is said to
have come from the practice of having each risktaker write his or her name under the total
amount of risk that he or she was willing to
accept at a price.
Each investment banking firm takes the
responsibility (and risk) of selling its specific
amount of equity or debt.

GROUP ACTIVITY

Alibaba wants to raise some money for a new
project. What can they do? Think primary and
secondary market.

Sample from wall st prep
UNDERWRITING EXAMPLE
Jingdong wants to raise some money for a new project.
One option is to issue more stock through the secondary
market. They’ll go to an investment bank like
JPMorgan, which will price the new shares (investment
banks are experts at calculating what a business is
worth). JPMorgan will then underwrite the offering,
meaning it guarantees that Jingdong receives proceeds
at $(share price * newly issued shares) less JPMorgan’s
fees. Then, JPMorgan will use its salesforce to go out
and get Fidelity and many other institutional investors
to buy chunks of shares. JPMorgan’s traders will help
the buying and selling of these new shares by buying
and selling Jingdong shares out of their own account,
i the Jingdong offering.
thereby making a market for
B. FINANCIAL ADVISORY (M & A)
The Investment bank helps a company or
government make decisions on managing
their financial advise resources. This
advice may include whether to buy
another company or sell off part of the
business. So, the investment bank will be
involved in mergers and acquistions (M &
A) advisory
B. MERGERS AND ACQUISITONS (cont)
Banks advise buyers and sellers on business
valuation (how to value a business and
determine what it is worth), negotiation,
pricing and structuring of transactions, as
well as procedure and implementation.
Valuation 计价 Jìjià
Negotiation 谈判 Tánpàn
Structuring 结构 Jiégòu
Transactions 交易 Jiāoyì
B. MERGERS AND ACQUISITONS (cont)
Important source of fee income for
investment banks. Higher than
underwriting fees. This is why M&A
bankers are some of the highest paid and
highest profile bankers in the industry.
We will look at investment banker salaries
later.
C. CORPORATE LENDING
Investment Banks (IB) help companies and
other large borrowers sell securities to raise
money. Sometimes they make loans to their
customers, often short term loans, called
bridge loans to help a company for a time
while another deal is in the making.
D. SALES & TRADING
Institutional investors such as pension
funds, mutual funds, life insurance firms
as well as hedge funds use investment
banks in order to trade securities.
Investment banks match up buyers and
sellers as well as buy and sell stocks and
other financial instruments out of their
own account.
For these services, investment banks
charge commission fees.
D. SALES & TRADING (cont)
Once the new securities are priced and
underwritten, Investment banks like JP
Morgan has to find buyers for the newly
issued shares in both the primary and
secondary market.
SALES - A firm’s sales force is responsible
for providing information about certain
securities to institutional investors.
D. SALES & TRADING (cont)
TRADING - Traders are the final link in the
chain, buying and selling securities on
behalf of these institutional clients and for
their own firm in anticipation of changing
market conditions and upon any customer
request.
E. BROKERAGE SERVICES
Some Investment banking operations
include brokerage services where they
may hold customers’ assets or help
them conduct trades.
F. RESEARCH
Investment Banks not only help large
institutions sell securities to investors, but
also assist investors looking to buy
securities. Many investment banks run
research units that advise investors on
whether they should buy a particular
investment.
TERM UNDERSTANDING
The terms INVESTMENTS, SECURITIES
or STOCKS and BONDS, or even FINANCIAL
INSTRUMENTS pretty much mean the same
thing.
G. INVESTMENTS – PRIVATE EQUITY
As mentioned early, investment bankers
serve the role of a middleman between
the firms or companies that need money
and those that have it. But, sometimes
investment banking operations may invest
their own money in companies or projects
that look good. This type of investment,
often made in companies that don’t have
investments that the public can buy, is
called private equity.
3. EMPLOYMENT BY JOB FUNCTIONS – Investment
Bank Organizational Structure
FRONT OFFICE - The front office
generates the bank’s revenue and consists
of three primary divisions: investment
banking, sales & trading and research.
INVESTMENT BANKING - Investment
banking is where the bank helps clients
raise money in capital markets and also
where the bank advises companies on
mergers & acquisitions.
3. EMPLOYMENT BY JOB FUNCTIONS – Investment
Bank Organizational Structure (cont)
SALES & TRADING - sales and trading is
where the bank (on behalf of the bank and its
clients) buys and sells products. Traded
products include anything from commodities
to derivatives, like options and swaps.
RESEARCH -Research is where banks review
companies and write reports about future
earnings. Other financial professionals buy
these reports from these banks and use the
reports for their own investment analysis.
3. EMPLOYMENT BY JOB FUNCTIONS – Investment
Bank Organizational Structure (cont)
MIDDLE OFFICE - includes risk
management, financial control, corporate
treasury, corporate strategy, and
compliance. The goal of the middle office
is to ensure that the investment bank
doesn’t engage in certain activities that
could be harmful to the bank’s overall
health as a firm, by taking on too much
risk.
3. EMPLOYMENT BY JOB FUNCTIONS – Investment
Bank Organizational Structure
BACK OFFICE - Includes operations and
technology. The back office provides
the support so that the front office can
do the jobs needed to make money for
the investment bank.
4. INVESTMENT BANKING SALARIES
 First
Year Investment Banking Analyst (2015)
 Base:
$85k (up from $70k in 2014)
Bonus: $55-$75k (2014 data)
 Second
Year Investment Banking Analyst (2015)
 Base:
$90k (up from $80k in 2014)
Bonus: $75-$95k (2014 data)
 Third
 Base:
Year Investment Banking Analyst (2015)
$90k-$100k ($90k in 2014)
Bonus: $95-$115k (2014 data)
4. INVESTMENT BANKING SALARIES (cont)
 First
Year Investment Banking Associate (2015)
 Base:
$110-$125k
Bonus: $80-$100k (2014 data)
 Beyond
 At
First Year Associate
the associate level, compensation starts to vary
more widely. At the highest end, associates can make
as much as $250k. The next level up is Vice President,
which make up to $400k. Highest on the food chain is
the Managing Director, who can make anywhere from
500k to several million dollars.