OCTOBER 25 : CUSTOM SELECT THE FINANCIAL ENVIRONMENT
Finance: The study of how individuals, institutions, governments and businesses acquire,
spend, and manage financial resources.
Three areas of finance:
1. Financial institutions
o Intermediaries that help the financial system operate efficiently and
transfer funds from savers and investors to individuals, businesses, and
governments that seek to spend/invest the funds.
2. Financial markets
o Forums that facilitate the flow of funds among investors, businesses,
o Sale or marketing of securities, analysis of the securities, and
management of investment risk through portfolio diversification.
Six principles of finance:
1. Money has a time value
2. Higher returns are expected for taking on more risk
3. Diversification of investments can reduce risk
4. Financial markets are efficient in pricing securities
5. Manager and stockholder objectives may differ
6. Reputation matters
Principle-agent problem: Conflict between managers and owners (i.e. investors). The three issues of financial management are:
o Profit Versus Return On Capital
Why study finance?
o To make informed economic decisions
o To make informed personal and business investment decisions
o To make informed career decisions based on a basic understanding of
business and finance
An effective financial system must have policy makers, a monetary system, financial
institutions and financial markets.
Money: Anything that is generally accepted as payment.
Three basic functions:
1. Medium of exchange
2. Store of value
3. Standard of value
Canadian Money Supply
Currency in circulation = currency outside the banking system.
M1: currency in circulation plus current accounts and personal chequable accounts.
M2: M1 plus notice deposits of firms and personal savings deposits at chartered
M1+: M1 plus personal chequable savings deposits at banks and near banks and non-
personal chequable notice deposits at banks and near banks.
M2+: M2 plus notice and term deposits at near-banks, and money market mutual
M3: M2 plus non-personal fixed term deposits and the Canadian dollar value of
chartered bank deposits denominated in foreign currencies but owned by Canadian
o Banks and other deposit-taking institutions
o Insurance companies
o Pension Funds
o Mutual Funds
Types of bonds:
o Debentures-unsecured debt. Backed only by the general assets of the issuing
corporation o Secured debt (mortgage debt) secured by specific assets
o Subordinated debt in default, holders get payments only after other
debtholders get their full payment
o Senior debt in default holders get payment before other debtholders get.
o Zero Coupon- pay face value at maturity only, sold at discount
o Junk bonds bonds with below investment grade rating
NOVEMBER 21 : CUSTOM SELECT CORPORATE GOVERNANCE
Corporate governance: Many definitions, but shareholders define it as what a company
should and shouldnt do.
Principle-agent theory = shareholder model of corporate governance, says:
o Shareholders are the principles, management is the agent.
o Primary objective of company is to max. shareholder wealth, and so goal of
corporate governance is to ensure this and to align interests of management
o Two factors cause principle-agent problem:
1. Separation of ownership and control
2. Incomplete contracts or costly enforceable contracts between agents and
principles, aka agency costs.
Two types of managerial failures that prevent acting in best interest of shareholders:
o Failures of managerial competence from unintentional mistakes or negligence
in discharging fiduciary duties (duties involving trust).
o Failures of managerial integrity caused by willful or opportunistic behaviors
(i.e. fraud) that have detrimental effects.
PRIMARY PURPOSE OF CORPORATE GOV.: To create and enhance sustainable and
enduring shareholder value while protecting the interests of other shareholders.
Structure Principles, Functions, and Mechanisms
And others (the ones from the powerpoint):
1. Honesty 2. Resilience
Should be based on the following principles:
1. Value-adding philosophy
2. Ethical conduct
4. Shareholder democracy and fairness
5. Integrity of financial reporting
1. Oversight function (of BOD)
2. Managerial function
3. Compliance function
4. Internal audit function
5. Legal and financial advisory function
6. External audit function
7. Monitoring function (of shareholders)
Three most important are oversight, managerial, and monitoring.
Designed to manage, direct, and monitor corporate activities in order to create sustainable
Ex: BOD, particularly independent directors, audit committee, management, internal
controls, and internal audit functions.
Designed to monitor companys activities, affairs and performance to ensure that interests
of insiders and outsiders are aligned.
Ex: capital market, labor market, court decisions.
Differences between Financial Reporting and CGR
Financial Reporting CGR
Legal requirement Not a legal requirement