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RSM332H1- Midterm Exam Guide - Comprehensive Notes for the exam ( 79 pages long!)


Department
Rotman Commerce
Course Code
RSM332H1
Professor
Kevin Wang
Study Guide
Midterm

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UTSG
RSM332H1
MIDTERM EXAM
STUDY GUIDE

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CHAPTER 1: AN INTRODUCTION TO FINANCE
1.1 WHAT IS FINANCE?
Finance is the study of how and under what terms savings (money) are allocated between lenders and
borrowers.
Finance is distinct from economics in that it addresses not only how resources are allocated, but also
under what terms and through what channels resources are allocated.
Financial contracts or securities occur whenever funds are transferred from issuer to buyer.
THE STUDY OF FINANCE
The study of finance requires a basic understanding of:
securities
corporate law
financial institutions and markets
1.2 REAL VERSUS FINANCIAL ASSETS
Real assets are tangible items owned by persons and businesses; e.g.:
Residential structures and property
Major appliances and automobiles (consumer durables)
Office towers, factories, and mines
Machinery and equipment
Financial assets are what one individual has lent to another, e.g.:
Consumer credit
Loans
Mortgages
THE HOUSEHOLD BALANCE SHEET
Households hold both real and financial assets
Households also acquire some of those assets through debt
A household with no financial assets often faces financial problems because real assets cannot
be easily used to pay off or service debt (i.e., make loan payments)
Real assets are not as liquid as most financial assets.
ASSETS AND LIABILITIES OF HOUSEHOLDS
1.3 THE FINANCIAL SYSTEM: Overview
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The household is the primary provider of funds to businesses and government.
Households must accumulate financial resources throughout their careers to have enough savings
(pension) to live during their retirement.
THE FINANCIAL SYSTEM:
Overview
Financial intermediaries transform the nature of the securities they issue and invest in (e.g.,
banks, trust companies, credit unions, insurance firms, mutual funds)
Market intermediaries, such as investment dealers and brokers (investment advisors), simply
help to make markets work by adding liquidity.
THE FINANCIAL SYSTEM:
Channels of Intermediation
Funds can be channeled from savers to borrowers in three ways:
1. Direct transfer from saver to borrower in a non-market transaction.
2. Direct intermediation through a market intermediary such as a broker in a market-based
transaction.
3. Indirect claims through a financial intermediary where the financial intermediary, such
as a bank, offers deposit-taking services and ultimately lends the deposited funds out as
mortgages or loans.
THE FINANCIAL SYSTEM:
Financial Intermediaries
Canadian Chartered Banks
Deposits fro uerous depositors fro aross Caada are pooled ito aks
Pooled funds are lent to households and businesses in the form of mortgages and loans
THE FINANCIAL SYSTEM:
Financial Intermediaries
Canadian Chartered Banks
(continued)
The ak trasfors the origial ature of the savers depositors oe:
Individual depositors save in small amounts and want to face little or no risk, but expect to be able to
withdraw their deposit at any time.
Loans and mortgages are usually large in amount, borrowed for long periods of time and for risky
purposes, and may not always be repaid in full.
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