Week 1 Real assets Tangible things (residential stuctures PPE), intangible things (patents, underestimated on balance sheet) Consumer items plus real investments to product goods Standard classification Household goods: major interest: the consumer personal finance: predominantly lends Business sector: intermediate producer: real investment business finance: predominantly borrows Government sector: public goods government finance: predominantly borrows Foreign sector: international finance: mixed Financial markets Financial asset a security under which funds are lent; a claim Debt contractual obligations where rights are determined under contract law. Equity: ownership claim on residual income of an enterprise rights determined under securities and corporate law Finance is based on: law, accounting and economics Intermediaries help borrowers find suitable lenders lenders non market transactions borrowers (direct claim) lenders market intermediaries borrowers (direct claims) Lenders financial intermediaries borrowers (indirect claims) Problems with direct nonmarket intermediation: 1) search costs,2) double coincidence of wants, 3)contracting costs,4) default, 5)liquidity. Asymmetric Information Asymmetric information the seller knows more than the buyer. Adverse selection information asymmetry before the transaction occurs: some borrowers are crooks Moral hazard the problem that the borrow may change their decision after receiving money. Market intermediaries Liquidity created by brokers solves issue 5 TSX Auction market lots of small buys and sells in specified location, investors are represented at these markets by brokers Dealer market no physical location, rather consist of a network of dealers who trade directly with one another. IPO initial public offering funds raised in primary market, then traded in secondary market. seasoned equity offering subsequent funds raised Listing requirements are weak Information Security analysts research investments and issue research reports remove issue 4 Brokerage firms research shares of firms they bring to market in and IPO sell side analyst Investment Funds Closed ended mutual funds collective fund with fixed number issued shares traded on a stock exchange. Supply shares are limited; they rise and fall in value according to supply and demand like ordinary company shares. CGI Canadian general investment. Price determined entirely by market demand Value added of investment funds Investment funds sold most of problems 15 Chartered Banks take deposits, lend out loans and mortgages, specialized lending officers, enforce payment better than others because of access to payment system. Asset transformation creates money and solves issue 15 Insurance Companies Insurance companies bear risk on behalf of clients. Asset transformation people cannot create own insurance, insurance companies pool thousands of risks to reduce risk to known probability of which they can price. Pension Funds Pension funds deferred compensation 2 types: defined benefit or defined contributions Asset transformation: defined benefit pension cannot be selfcreated Credit unions and caisses populaires organized around a particular group: union members, employees of a particular firm, and so forth.