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Lecture 1

MGT338H5 Lecture 1: lecture 1.docx

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Adam Kadar

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Class 1
Chapter 1
Finance = how and under terms and through what channels savings are allocated
Anytime one person or one party (lender or borrower), other party formalizes that through
contract  security is created
Financial asset  any type of security
Households: have assets aka car, investments, house, etc
Sometimes these are purchased through debt (aka mortgage)
Real assets cannot be easily used to pay off debt if household has no financial asset
Households = primary provider of funds to businesses and gov
Financial intermediaries: what comes in on one end is not what it looks like on the other end.
If deposit money as savings, bank takes money and gives it away as loan
Market intermediaries: e.g. real estate agent  making real estate market more liquid
Don’t transform what is happening , they are adding liquidity while in financial you transform
what is happening
Channel of Intermediation
How can money go from a borrower to a lender
1. Direct  does not go thru bank, get straight money, non market transaction
2. Direct through market intermediary  transaction facilitated by broker
3. Indirect through financial intermediary  pool all funds from different depositors, bank
takes aggregate amount, yet you do not know where your money is going and your
money is being lended to. Borrower related to bank. Lender related to bank. Lender and
borrower do not have relationship with each other, both have relationship with bank
Market intermediary helps people get loans
Financial intermediaries (transform): banks, insurance companies, pension funds , mutual
Canadian chartered banks (BMO, Scotia, RBC, etc)
Characteristics of someone who deposits money and keeps money at the bank
oDeposit not huge, do not want too much risk, want to earn small amount of
interest on savings, want to have access to their money at any time
Characteristic of someone who wants a loan (e.g. mortgage)
oWant lots of money, want to borrow money for a long time, has high risk
associated, loan may not necessarily be paid in full due to risk
Banks can do this as they are good at assessing risk (e.g. credit rating) and understanding needs,
and pricing the risk (charge higher interest on loan) and monitor activities of borrowers (on going
activities, if have lost job, etc)
Bank Run: to solve, provide lenders high return in order to keep money to facilitate them as they
have given all their money to borrowers
In = deposit
Out = loan
Insurance Companies (Manulife, Sun Life, etc)
Usually pay monthly, annual premium that you must pay based on pricing of policies given
probability and size of policy
Insurance = free money for insurance company, until something you are insuring against
Lets people engage in risk without having to bear entire risk of loss
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