Lecture 6.docx

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Department
Management and Organizational Studies
Course
Management and Organizational Studies 1023A/B
Professor
Maria Ferraro
Semester
Winter

Description
Chapter 1: An Introduction to Finance Finance:  The study of how and under what terms savings (money) are allocated between lenders and borrowers  Closely related to economics  Not only how resources are allocated but also under what terms and through what channels  Financial securities: financial contract whenever funds are transferred  The management of an entity’s balance sheet Real vs. Financial Assets Canada’s Balance Sheet  Balance Sheet o Snapshot of what is owned (assets) and what is owed (liabilities) o Difference between them is net worth/equity Real Assets  Real Assets o The tangible things that compose personal and business assets  Personal assets o Value of houses, land, major appliances and cars o Major appliances and cars are known as consumer durables  Business assets o Office towers, factories, mines, machinery, equipment, land and inventories o Capital expenditure: asset acquisition o Corporate financing decisions finance expenditures Financial Assets  Useful source of disaggregate data of financial assets: National Balance Sheet Accounts (NBSA)/StatsCAn o Collect financial data on the major agents in the financial system  Financial assets o What one individual has lent to another o One person’s positive financial asset is another’s negative financial asset  The government and business entities obtain most of their financing from the domestic household sector, with the remaining small proportion of their financing coming from foreign investors The Financial System  Households are the primary provider of funds to businesses and government  Financial Intermediaries o Entities that invest funds on behalf of others and change the nature of the transactions o Transform the nature of the securities they issue and invest in  Market Intermediaries o Make the markets work better Channels of Intermediation  Intermediation o The transfer of funds from lenders to borrowers o Borrowers can obtain funds directly from individuals o Borrowers can obtain funds indirectly from individuals who have first loaned (deposited) their savings to a financial institution  Non-Market Transactions o Lender provides money directly to the ultimate borrower o Exchange is negotiated directly between the borrower and lender  Market Intermediary o An entity that facilitates the working markets and helps provide direct intermediation but does not change the nature of the transaction; also called a broker o Assist with the transaction and bring borrowers and lenders together o Make markets work o Retail: help individuals o Institutional: help financial intermediaries o Ex. Real estate and mortgage brokers, stockbrokers and insurance brokers  Financial Intermediaries o Lends the money to the ultimate borrower but raises the money itself by borrowing directly from other individuals o Change the nature of the transaction o Ultimate lenders have an indirect claim on ultimate borrowers Intermediaries  Core activity of Canadian banks is acting as deposit takers and lenders  Insurance companies also are major financial intermediaries  Insurance companies o A form of saving o Contractual savers  The premiums are paid on a monthly basis so that the insurers receive a steady flow of money o “Pure” insurance companies  Do not have a significant savings component  Pension plans o Held directly for their pensioners, and they substitute for having individuals save for themselves for their retirement o Contractual savers  Mutual funds o Do not change the nature of the financial contract o Often use monthly savings plans, but not always o Pool small sums of money so that they can make investments that would not be possible for smaller investors o Offer professional expertise in the management of those funds o Act as a pass through o Not financial intermediaries The Major Borrowers  Government o Crown Corporations  Government-owned companies that provide goods and services needed by Canadians o Government debt market plays a very important role in the financial system o Government is a net debtor and a significant borrower o The interest rates paid on different types of government debt serve as benchmarks for the Canadian financial system  Private debt o Financing houses and consumer credit  Business o Makes the goods and services we consume, and it borrows to finance growth in this capacity o Profits on non-financial corporations are significantly less than those of the big five chartered banks Financial Instruments and Markets Financial Instruments  Financial ass
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