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BU 111 Final Exam Review Notes.docx

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Roopa Reddy

BU 111 2012Economic FactorsCanadian Financial SystemFinancial institutions facilitate flow of moneyFour distinct legal areas pillars o Chartered banks o Alternate banks o Life insurance companies o Investment dealersLines between pillars have been blurred due to deregulation Pillar 1Chartered BanksPrivately owned publicly traded profit seekingLargest and most important institutionConcentrated and highly regulated industry o Five largest account for 90 of total bank assets o Bank Act limits foreigncontrolled banks to 8 of total domestic bank assetsServe individuals business and othersMajor source of shortterm loans for business o Secured when you put up collateral against loan lower rate of interest vs unsecured loans not required to put up collateralExpand money supply through deposit expansionIntermediaryNot owned by government Changes in BankingDeregulation in 1980s allowed banks to diversify their servicesChanges in consumer demands lower fees higher rates of returnCompetition from foreign banks HSBC bank domestic banks must remain competitive with foreign banks but are not able to merge due to regulations back office operations decrease costshelp domestic banks stay competitive Bank of CanadaCanadas central bankManages economy and regulates aspects of chartered bank operationsManages money supply Pillar 2Alternate BanksTrust companiescredit unionsTrust companies are being bought out by larger banksCredit unions allow members to save Pillar 3Specialized lendingsaving intermediariesInsurance co second largest financial intermediaries next to banks paying a premium for service venture capital firms fill a gap that banks do not want to fulfill willing to take on more risk if they see growth potential but expect more ownership than banks pension funds Ontario teachers pension plan leverage more money by making more money Pillar 4Investment DealersFacilitate trade of stocks bonds and other products in Securities MarketsPrimary Markets o Investment bankersdealers o Advise underwrite distributeSecondary Markets Toronto Stock Exchange and other exchanges over the counter trading BU 111 2012International BankingFinanceGovernments and corporations frequently borrow in foreign marketsStimulate more global tradeInternational bank structure o Aims for stability o World Bank provides limited services funds national improvements aims to improve infrastructure o International Monetary FundImpose austerity measures 188 member countriesLoans given have strict conditions and some countries cannot meet the conditions and some countries cannot repay the loanPromotes stability of exchange ratesProvides shortterm loans to membersEncourages member cooperationPromotes system for international paymentsEconomic FactorsInvestment Instruments Types of Investments BONDSRepresents debt for issuing corporation or governmentCharacteristics o Legal binding agreement o Fixed rate of return often paid semiannually coupon rate o Fixed termprincipal repaid at maturity o Priority over stockholdersTypes o Secured vs Unsecured debentures o Registeredthe issuer has your name and contact info on file so that they know who owns the bond vs Bearer information is not kept on file so whoever owns the certificate can claim the coupon rateFeatures o Callable gives the issuer the right to call the bond back before maturity helps to reduce debt o Serial different parts of the bond may mature at different times makes it easier to pay the debt since it is not paid all at once o Convertible allows investor to convert their bond holdings to a fixed number of shares in the company allows investor to profit more due to an increase in stock prices Determinants of Bond Value 1 What impacts the coupon rate at bond issuePrevailing interest ratesCredit rating of issuerFeatures 2 What impacts bond price when tradedCoupon rateprevailing rates of interest relationshipChanges in credit ratingEconomicMarket RiskInflation
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