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Lecture 6

Management and Organizational Studies 1023A/B Lecture Notes - Lecture 6: Government Debt, Financial Institution, Savings Account

by

Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro
Lecture
6

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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
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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
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