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Final Review Part III BU111.docx

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Sofy Carayannopoulos

Canadian Financial System -Financial institutions facilitate the flow of money -Make money accessible -Four distinct legal areas/pillars: -Chartered banks TD, CIBC -Regulated by government and the bank charters them -In order to grow, banks invest in other areas. -Ex. TD bought a trust union and it is now TD Canada trust. It can now open trading accounts and invest -Alternative banks Credit Unions -Life Insurance companies Investments they make -Investment dealers Security -Lines between pillars have been blurred due to reregulation Pillar 1: Chartered Banks -Privately owned -Anyone can purchase stocks and become owners -Put money in and borrow money from -Serve individuals, business, and others -Largest and most important institution -Five largest account for 90% of total bank assets -Bank Act limits foreign controlled banks to <8% of total domestic bank assets -Major source of short loans for business -Secured vs. unsecured loans -A mortgage is a secured loan you pledge your house to the bank -An unsecured loan is credit cards. Nothing specific has been pledged -Expand money supply through deposit expansion -Deposit expansion take your money and loan it to others -Changes in banking -Deregulation -Consumers want better and cheaper service. -Banks have consumers by the throat but cant raise the rates they charge of they will become regulated by the government which the banks do not want. -Changed in consumer demands -Competition from foreign banks -Foreign banks can only limitedly compete in Canada -Bank of Canada -Open market operations -Bank of Canada is where banks go to get loans they set the interest rate -Bank rate Pillar 2: Alternate Banks -Trust companies and credit unions Pillar 3: Specialized lending/saving interm. -Insurance companies, venture capitalist firms, pension funds -Insurance companies invest the money you invest -Venture capitalist lend your money to risky businesses that will prosper Pillar 4: Investment Dealers -Facilitate trade of securities -Middle man between corporations and investors Bonds Securities Markets -Where stocks, bonds, and other securities are sold -Primary markets -First place companies go to start new stocks -Investment bankers -Provide advice, and buy securities from corporation create a distribution network -From primary, these companies then go to the secondary markets -Secondary markets -Toronto Stock Exchange and other exchanges Bonds -Represent debt lending by investor -When you buy a bond you are lending money to the Canadian government -Ex. Canadian savings bong -Legal obligation bond must be paid back with interest -Interest paid on loan is tax deductable -Characteristics of a bond -Fixed rate of return (often paid semi annually) -Coupon rate percentage of face value (what you purchased the bond for) -We always assume $1 000 face value -Fixed term principal repaid at maturity -Maturity date day you get paid -Priority over stockholders -Bond holders are paid before stockholders -Types -Secured vs. unsecured (aka debentures) -Registered vs. Bearer -Registered bonds company knows which individuals own the bonds -Bearer bonds - anonymous -Callable -Bond can be retired when company decides -Company will pay you an incentive -Serial, convertible -Serial bonds large number of bonds mature at different times -Convertible bonds can be converted to common shares Bond Value Determined by: -Prevailing interest rate -Higher interest rate = higher coupon rate -Coupon rate -Higher coupon rate higher the value of the bond -Credit rating of issuer -Risk in an important factor in bonds -The higher the risk the higher the return -The riskier the bond less value because it is less desirable -Features -Time to maturity Yield -Percentage return on any investment -Levels the playing field Yield = What you made What you paid Calculating Approximate Yield to Maturity (assume it will hold until maturity) Ex. Bought 6% bond for $850 with ten years to maturity. How are Bond Prices Determined? -only thing we can manipulate is price
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