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Chapter 1

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


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 anothers 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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