MGT100H1 Chapter Notes - Chapter 16: Mutual Fund, Reserve Requirement, Insider Trading
Chapter 16: The Financial System
●Financial system: mechanism by which money flows from savers to users
○Savers and borrowers are individuals, businesses, and governments. Generally,
individuals are net savers, meaning they spend less than they make. Businesses and
governments tend to be net borrowers
●Types of securities
○Securities: financial instruments that represent the obligations of the issues to provide the
purchasers with the expected stated returns on the funds invested or loaned
○Money market instruments: short-term debt securities issued by governments, financial
institutions, and corporations
■Generally low-risk securities and are purchased by investors when they have
surplus cash
○Bonds: bondholders are creditors of a corporation or government body
■Government bonds: bonds sold by the Canadian government. Backed by the full
faith and credit of the canadian government, least risky of all bonds
■Municipal bonds: issued by municipal governments
●Corporate bonds and mortgage-backed corporate bonds
■Mortgage-backed corporate bonds (mortgage-backed securities): backed by
pool, or group, of mortgage loans purchased from lenders such as chartered
banks
○Shares
■Common shares: basic form of corporate ownership, true owners of a
corporation, vote on major company decisions
■Preferred shares: holders of preferred shares receive preference in the payment
of fixed dividends, regardless of how profitable the firm becomes, rarely have
voting rights
■Convertible securities: include conversion feature, gives the bondholder or holder
of preferred shares the right to exchange the bond or preferred shares for a fixed
number of common shares
●Financial markets
○Financial markets: markets where securities are issued and traded
○Primary markets: firms and governments issue securities and sell them initially to the
general public
○Secondary market: collection of financial markets where previously issued securities are
traded among investors
○Financial institutions purchase new securities issues from corporations or provincial and
municipal governments, and then resell the securities to investors. The institutions charge
af fee for their services
●Stock markets
○Stock markets (exchanges): markets where shares of stock are bought and sold by
investors
○Two largest: New York Stock Exchange and the NASDAQ stock market
○The london stock exchange: the most international of the world’s stock markets.
○Market order: instructs the investor's broker to obtain the best possible price when buying
or selling securities
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Document Summary
Financial system: mechanism by which money flows from savers to users. Savers and borrowers are individuals, businesses, and governments. Generally, individuals are net savers, meaning they spend less than they make. Businesses and governments tend to be net borrowers. Securities: financial instruments that represent the obligations of the issues to provide the purchasers with the expected stated returns on the funds invested or loaned. Money market instruments: short-term debt securities issued by governments, financial institutions, and corporations. Generally low-risk securities and are purchased by investors when they have surplus cash. Bonds: bondholders are creditors of a corporation or government body. Government bonds: bonds sold by the canadian government. Backed by the full faith and credit of the canadian government, least risky of all bonds. Mortgage-backed corporate bonds (mortgage-backed securities): backed by pool, or group, of mortgage loans purchased from lenders such as chartered banks.
