ACCT 4340 Chapter Notes - Chapter 8: Td Canada Trust, Time Deposit, Secured Loan

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Published on 19 Apr 2013
University of Guelph
ACCT 4340
of 3
Chapter 8
Money is an object generally accepted as payments for products, has 4 key
o(difficult to counterfeit)
Barter economies, where goods are exchanged directly for each other, are
inefficient compared to money economies. Money has three functions:
oMedium of exchange
oStore of value
oUnit of account, all products can be valued in terms of the money
Money substitutes such as credit cards also exist of convenience
Purpose of financial institutions is to ease money flow from sectors with
surpluses to those with deficits
Previously, there were 4 key legal elements of the financial system; this
distinction began to erode in 1980.
Financial Pillar 1: Chartered Banks
Privately owned firms that serve as financial intermediaries in an economy,
are profit-seeking.
Schedule A banks are the major banks we hear about (e.g. TD Canada Trust),
the 1980 Bank Act requires that no more than 10% of voting shares be
controlled by a single interest
Schedule B banks are usually foreign entities set up in Canada, and are not
required to follow the 10% rule mentioned above
Services offered by banks:
oPension services to help customers plan for retirement with
oTrust services: look after money. A fund of money is set up and the
bank will invest the money and pay the proceeds to the beneficiaries.
oInternational services
Currency exchange
Issue letters of credit –a promise to by a bank to pay money to a
business if conditions are met (e.g. not until proof of shipment is
Draw up a banker’s acceptance: a promise that the bank will pay
a specific amount of money at a future date.
oFinancial advice
oAutomated teller machines
Bank deposits
oChequable/demand deposits constitute a chequing account from which
customers can write cheques from
oA term deposit will remain with the bank and collects interest
Aside from a savings account, Guaranteed Investment
Certificates (GICs) are also term deposits. They cannot be
cashed in before maturity.
Bank loans
oSecured loan: backed by collateral that will be seized if the loan in not
oUnsecured loans are only a promise to repay
oPrime rate of interest: lowest rate charged to borrowers such as
chartered banks borrowing from the Bank of Canada and large firms
borrowing from chartered banks. Consumer loans use the ‘base rate.’
Banks as Creators of Money
In the Canadian financial system, banks create money by lending out
deposited idol money. When it is let out, the same money that was originally
deposited is spent, so money is generated.
oReserve requirement: the portion of demand deposits that cannot be
loaded out, the requirement was dropped in 1991.
oBanks keep reserves in case a “run on the bank” occurs (customer
rush to withdraw deposits)
Changes in Banking
Deregulation has caused banks to offer a wider array of financial products,
such as selling commercial papers. As consumer turn increasingly to
alternate, electronic banks (e.g. ING Direct), banks are making a larger
portion of their profits from bank fees
Electronic funds transfer services which transfer funds among financial
institutions using computers and communications. Digital money is now
replacing cash.
Debit cards are used to instantly transfer funds from one bank account to
another. Retailers used Point-of-Purchase (POP) terminals to accept debit
Smart cards can be programmed with electronic money and store it
E-cash is money that is transferred via digital communications and is stored
on computer systems. It is vulnerable to hackers and memory failures, and is
not regulated.
Pay-by-Phone: performing banking transactions by phone
Direct Deposit: automatically accepting funds to and paying bills from bank
With international banks now allowed to do business in Canada, domestic
banks are looking to joint-venture or merge to increase competitiveness.
Financial Pillar 2: Alternate Banks
Trust Companies: safeguard funds and estates entrusted to it, may also
transfer ownership of corporations and issue dividend cheques.
Credit Unions/ Caisses Populaires: lend money at relatively low rates to
consumers who buy durable goods such as cars, formed co-operatively by
groups of common interests (e..g a credit union formed by a labour union or
Financial Pillar 3: Specialized Lending and Savings Intermediaries
Life Insurance Companies: lends money it collects in the form of premiums to
invest in real estate, mortgages, bonds, stocks, or mutual funds. Earning of
investment must be greater than insurance payouts to be profitable.
Factoring Companies: buys accounts receivable of a business for less than
face value, and turns a profit by collecting them.
Financial Corporations:
oSales Finance Company: finances purchases in which the item serves
as collateral for the loan (e.g. buying a car).
oConsumer Finance Company: makes personal loans to consumers
Venture Capital or Development Firms: provide either equity or debt
financing to businesses that show great potential
Pension Funds: Accumulates and invests money that is to be paid out in the
Financial Pillar 4: Investment Dealers
Investment dealers are also called stockbrokers or underwriters
Buy shares at an IPO and distribute them and facilitate secondary trading
Other institutions exist that lend funds out to businesses and consumers for
specialized purposes, such as taking mortgages or a business operating in
certain locations.
International banking
Exchange rates affects whether companies do business in other countries
Law of One Price: identical products should sell for the same price in all
countries. Can be used to determine if a country’s currency is under or
Governments can influence exchange rate by devaluing or revaluing