chapter 15 1 understanding money, financial institutions, and the securities markets understanding...

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Understanding Money, Financial Institutions, and the Securities Markets

Understanding Money, Financial Institutions, and the Securities Markets

Prepared byNorm Althouse

University of Calgary

Prepared byNorm Althouse

University of Calgary

Copyright © 2011 by Nelson Education Ltd.

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1 Understand the characteristics of money and its functions.

2 Describe the basic functions of the Bank of Canada, and how it manages the Canadian money supply.

3 Identify the key financial institutions, and the role they play in the process of financial intermediation.

4 Outline how the Canada Deposit Insurance Corporation protects depositors’ funds.

5 Summarize the role of Canadian banks in the international marketplace.

6 Distinguish between common shares and preferred shares.

7 Understand the investment advantages and disadvantages of bonds.

8 List other types of securities available to investors.

9 Describe the function of the securities markets.

10 List some of the trends that are reshaping the financial industry.

Learning Outcomes

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Money, Financial Institutions, and the Securities Markets

Copyright © 2011 by Nelson Education Ltd.3

Advanced technology, globalization of markets, and the relations of regulatory restrictions are accelerating the pace of change in the financial services industry.

Advanced technology, globalization of markets, and the relations of regulatory restrictions are accelerating the pace of change in the financial services industry.

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Characteristics of Money

DivisibilityDivisibility

PortabilityPortability

DurabilityDurability

ScarcityScarcity


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Functions of Money

Store of ValueStore of Value

Standard of ValueStandard of Value

Medium of ExchangeMedium of Exchange

FunctionsFunctionsof Moneyof Money

FunctionsFunctionsof Moneyof Money


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The Canadian Money Supply

Time DepositsTime Deposits

Demand DepositsDemand Deposits

CurrencyCurrency

Pay interest cannot be withdrawn on demand

Pay interest cannot be withdrawn on demand

Money in chequing accountscan be withdrawn on demandMoney in chequing accountscan be withdrawn on demand

Coins and Paper MoneyCoins and Paper Money


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The Bank of Canada Activities

Price StabilityPrice Stability

Full EmploymentFull Employment

Economic GrowthEconomic Growth

funds-management services

supplies quality bank notes

conducts monetary policy

promotes safety and efficiency of Canada’s financial system


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Monetary Tools and Their Effects

8


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Financial Intermediation


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Financial Institutions

Non-depositoryInstitutions

Non-depositoryInstitutions

DepositoryInstitutions DepositoryInstitutions

Chartered BanksChartered Banks

Trust CompaniesTrust Companies

Credit Unions orCaisses Populaires

Credit Unions orCaisses Populaires


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Insuring Deposits

Insures eligible deposits to the value of $100,000Insures eligible deposits to the value of $100,000

Accountable to Canada’s Parliament > Minister of FinanceAccountable to Canada’s Parliament > Minister of Finance

Federal Crown CorporationFederal Crown Corporation

Canada Deposit Insurance Corporation (CDIC)Canada Deposit Insurance Corporation (CDIC)Canada Deposit Insurance Corporation (CDIC)Canada Deposit Insurance Corporation (CDIC)


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Offer Trade-Related Services

Offer Trade-Related ServicesProvide LoansProvide Loans

Provide global cash management services Help firms manage cash flows Improve their payment efficiency Reduce exposure to operational risks

International Banking The Role of Canadian Banks


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Stocks and Bonds


BondsBondsBondsBonds

SharesSharesSharesShares

SecuritiesSecurities Investment certificates that represent either equity or debtInvestment certificates that

represent either equity or debt

• Ownership that allows voting rights• Can be bought and sold (liquidity) • May pay dividends


• Dividends set at issuance, and are paid before common stock dividends

• Ownership does not allow voting rights



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Shares

Preferred Shares

Preferred Shares

Common Shares

Common Shares








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Bonds

BondsBondsBondsBonds

Long-term debt obligationsLong-term debt obligations

Principal – par valuePrincipal – par value

Interest – coupon rateInterest – coupon rate


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Types of Bonds

GovernmentGovernment

High-yield (junk) bondsHigh-yield (junk) bonds

Convertible bondsConvertible bonds

CorporateCorporate

Mortgage bondsMortgage bonds

DebenturesDebentures


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Other Types of Securities

Mutual FundMutual Fund

Futures ContractsFutures Contracts

OptionsOptions

Financial-services companythat pools investors’ funds

to buy a selection of securities

Financial-services companythat pools investors’ funds

to buy a selection of securities

Legally binding obligations to buyor sell commodities or

financial instruments at later date

Legally binding obligations to buyor sell commodities or

financial instruments at later date

Contracts to buy or sell quantities of common stocks or financial

instruments at later date

Contracts to buy or sell quantities of common stocks or financial

instruments at later date


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Appeal of Mutual Funds

Good way to hold a diversified, less risky, portfolio

Professional management

May offer higher returns


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Securities Market

Help companies raise long-term financing, a process

called underwriting

Help companies raise long-term financing, a process

called underwritingInvestment BankersInvestment Bankers

A person licensed to buy and sell securities on behalf of clients

A person licensed to buy and sell securities on behalf of clientsStockbrokerStockbroker

Online InvestingOnline Investing Improvement in Internet technology

Improvement in Internet technology


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Types of Markets

SecondaryMarket

SecondaryMarket

Old (already issued) securities are bought and sold, or traded, among investors

Old (already issued) securities are bought and sold, or traded, among investors

PrimaryMarket

PrimaryMarket New securities are sold to the publicNew securities are sold to the public


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Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Types ofTypes ofSecuritiesSecuritiesMarketsMarkets

Over-the-Counter MarketOver-the-Counter MarketOver-the-Counter MarketOver-the-Counter Market

Organized Stock ExchangesOrganized Stock ExchangesOrganized Stock ExchangesOrganized Stock Exchanges

Buying and Selling at Securities Exchanges


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A telecommunications network that links dealers and enables them to trade securities.

A telecommunications network that links dealers and enables them to trade securities.

Over-the-Counter(OTC)Market

Over-the-Counter(OTC)Market

The first electronic-based stock market and the fastest growing part of the stock market.

The first electronic-based stock market and the fastest growing part of the stock market.

NASDAQNASDAQ

The Over-the-Counter Market


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Bull MarketBull

Market

BearMarketBear

Market

Prices rise. Better returns.Prices rise. Better returns.

Prices go down. Low, or negative, returns.Prices go down. Low, or negative, returns.

Bull or Bear Market?


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Changing the Way We BankChanging the Way We Bank

Trends in Financial Institutions

regulationsservices offered


Integration of Banking, Brokerage, and InsuranceIntegration of Banking, Brokerage, and Insurance

Delivery of Services with “Clicks and Bricks”Delivery of Services with “Clicks and Bricks”

Growth of Mega-Financial InstitutionsGrowth of Mega-Financial Institutions

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