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Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

LECTURE 6 TEXTBOOK NOTES o Finance: study of how and under what terms saving (money) are allocated between lenders and borrows Whenever funds transferred, a financial contract comes into existence: financial securities o Requires basic understanding of securities and corporate laws that facilitate funds Canadian balance sheet o Difference between what is owned/owed: equity/net worth o Real Assets: represent tangible things that compose personal and business assets o Finance is essentially management of entity’s balance sheet o Asset acquisitions: generally referred to as capital expenditure (capex) decisions o Liabilities: ways to finance expenditures aka. Corporate financing decisions o Financial assets: what individual lent to another; one’s assets/liabilities o National Balance Sheet Accounts NBSA: produced by StatsCan; useful source of data o Basic idea behind the NBSA: take financial data of major agents  Ex. Persons and unincorporated business grouped household sector account 4 major ways of financing o Personal finance o Government finance o Corporate finance o International finance - Even though the main focus of finance is on corporate finance, the primary source of savings is household sector o 2 major financial assets: market value of investment in shares and market value of investment in insurance/pensions o Net providers of financing: older higher-income individual save/accumulate financial assets (positive financial asset position) o Net users for financing: younger and less wealthy individuals borrowing to buy houses and consumer durables (negative financial asset position) o Non-resident sector usually net provider of funds Households o The major real assets are houses, consumer durables ( like washing machines, cars) and so on o Offsetting these financial assets are billions of dollars in consumer credit (credit cards) The Financial System o Financial intermediaries: entities that invest funds on behalf of others and change nature of transactions o Transform nature of securities they issue and invest in o Market intermediaries that simply make markets work better o Whole package of institutions is Canadian financial system o Intermediation: transfer of funds from lenders to borrowers o 2 extremes in terms of transfer of money from lender to borrower o Borrower obtain funds directly from individuals o Obtain indirectly form individuals who first loaned (deposited) savings to financial institution 3 channels 1. Direct intermediation: non-market transaction; exchange negotiated between borrower and lender o Also direct requires help to find suitable lenders; help from market intermediaries 2. Market intermediary: entity that facilitates working of markets and helps provide direct intermediation o A.k.a. Brokers o Responsibilities are to assist with transaction and bring borrowers and lenders together; do not change nature of transactions o Most important financial market in Canada is TSX; supports variety of market intermediaries 3. Financial institution/financial intermediary lends money to ultimate borrowers but raise money from borrowing form others o Ultimate lenders have indirect claim from ultimate borrower, direct claim from financial institution o Commonly refer marketing and financial intermediaries as “retail” (marketing) and “institutional” (financial) markets Intermediaries o Banks and insurance companies are important financial intermediaries o Canadian bank’s core activity: acting as deposit takers and lenders o Contractual savers: insurance companies; most cases, premiums paid on monthly basis so that insurers receive steady flow of cash o “Pure” insurance companies which do not have significant savings component are much smaller o Major financial assets of household sector: insurance/pension plans o Funds in pension plans held directly from pensioners o Insurance companies are contractual savers because in most cases, the premiums are paid on a monthly basis so that the insurers receive a study flow of money  3 most important financial institutions that change nature of financial contract 1. Chartered bank  Take in deposits and make loans 2. Pension funds  Take in contributions and provide pension payments after plan members retire 3. Insurance company  Take in premiums and pay off when an incident occurs, such as death or a fire o Mutual funds act as pas through for individuals; convenient way to invest in equity/debt markets o Receive money through monthly savings plan o Mutual funds have 2 major functions  They pool small sums of money so they can make investments not possible for smaller investors  Offer professional expertise in management of those funds  Don’t transform nature of underlying financial security Major borrowers o Government provides many services to Canadians which sometimes require borrowing o Crown corporations: provide goods and services needed by Canadians o Provinces and territories are net debtors except for Alberta, Yukon, and Northwest Territories o Federal government is net debtor and significant borrower o Government raise money for citizen through direct taxation/monopolizing/charging higher fees (taxes) o Government debt regarded as default free, only debt people can invest in and know they’ll get promised payments o Interest rates paid on different types of government debt serve as benchmark o Most important borrowing sector is business o Borrows finance growth in this capacity of making goods/services we consume o Assets need to be financed and reflected in firm’s capital expenditure and corporate financing decisions o On avg. non-profits corps have a lot less profit Financial Instruments and Markets: o Financial assets: formal legal do
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