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MOS 1023A/B (100)
Maria Ferraro (80)
Chapter 1

Management and Organizational Studies 1023A/B Chapter Notes - Chapter 1: Canada Pension Plan, Financial Intermediary, Financial Institution

School
Western University
Department
Management and Organizational Studies
Course Code
MOS 1023A/B
Professor
Maria Ferraro
Chapter
1
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Chapter 1.1 Real versus Financial Assets
•finance is the study of how and under what terms savings are allocated between lenders and
borrowers
•finance is not just about how resources are allocated but also under what terms and through
what channels
•whenever funds are transferred, a financial contract comes into existence, and these contracts
are called financial securities
Canada’s Balance Sheet
•a balance sheet is a snapshot of what is owned (assets) and what is owed (liabilities) at a
particular time
•difference between the value of what is owned and what is owed is net worth or equity
•can estimate balance sheets for individuals and for institutions (both businesses and
governments)
•three major domestic groups in our economy: (1) individuals, referred to as the household
sector, (2) businesses and (3) government
•Canadian assets and liabilities that are held by non-resident individuals, businesses and
governments compose the balance sheet of the non-resident sector, which we generally “net” out
to determine what the country owes to or is owed by non-residents
•as of 2005, Canadians had total assets with a market value os $4 567 billion or $135 000 for
every Canadian
Real Assets
•real assets representing the tangible things that compose personal and business assets
•personal assets are the value of houses, land, major appliances
•major appliances and cars are referred to as consumer durables
•for businesses, the major assets are office towers, factories, mines, machinery and equipment
•finance is essentially the management of an entity’s balance sheet
•build a new factory, make strategic asset acquisition decisions, such as buying another firm,
examples of asset acquisition
•asset acquisitions, generically referred to as capital expenditure
•liability- ways to finance these expenditures, which we will refer to as corporate financing
decisions
•all entities have a balance sheet
Financial Assets
•national balance sheet nets out all the debts we owe to ourselves, which is almost all of our
debt
•National Balance Sheet Accounts (NBSA)
•basic idea behind NBSA is to collect financial data on the major agents in the financial system
•financial assets are simply what one individual has lent to another, one person’s position
financial asset is another’s negative financial asset (or liability)
•Canadian households owned net financial assets issued by government, corporations and non-
residents

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•in 2005, all layers of Canadian governments had real assets worth $497 billion
•government had net financial assets of -$634 billion, which is the market value of all
government debt outstanding
•when we add up the total net financial assets of these three sectors, we end up with financial
assets owned by non-residents
•government and business entities obtain most of their financing from the domestic household
sector with the remaining small proportion of their financing coming from foreign investors
•four major areas of finance: personal, government, corporate, international
•primary source of savings is the household sector
Households
•offsetting these financial assets are $260 billion in consumer credit, $131 billion in mainly
bank loans and $588 in mortgage debt
•two major financial assets of the household sector: market value of investments in shares and
market value of investments in insurance and pensions
•net negative financial asset position vs. net positive financial asset position
•the people taking out the mortgage debt and consumer credit are generally not the same people
as those investing
The Financial System
•basic financial flow is “intermediated” through the financial system, which comprises (1)
financial intermediaries that transform the nature of the securities they issue and invest in,
and (2) market intermediaries that simply make the markets work better
Channels of Intermediation
•financial system transfers funds from lenders to borrowers, occurs through intermediation
•borrowers obtain funds directly from individuals or they borrow indirectly from individuals
who have first loaned their savings to a financial institution, which in turns lends to the ultimate
borrowers
•three basic channels
•first is direct intermediation, where the lender provides money directly to the ultimate
borrower, non-market transaction
•second channel also represents direct intermediation between the lender and borrower, but in
this case, some help is needed because no one individual can lend the full amount needed or
because the borrower is not aware of the available lenders
•market intermediary is simply an entity that facilitates the working of markets and helps
provide direct intermediation
•market intermediaries are called brokers i.e. real estate and mortgage brokers, insurance
brokers, stockbrokers
•their responsibilities are to assist with the transaction and bring borrowers and lenders together,
but they do not change the nature of the transaction itself
•most important financial market in Canada is the stock market, or the Toronto Stock Exchange
(TSX), which supports a variety of market intermediaries
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