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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.
Ch
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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
2
Copyright © 2011 by Nelson Education Ltd.
Ch
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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
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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Pay interest cannot be withdrawn on demand
Pay interest cannot be withdrawn on demand
Money in chequing accountscan be withdrawn on demandMoney in chequing accountscan be withdrawn on demand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
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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Monetary Tools and Their Effects
8
Copyright © 2011 by Nelson Education Ltd.
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Financial Intermediation
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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)
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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Stocks and Bonds
Copyright © 2011 by Nelson Education Ltd.
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
• 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
• 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
• Dividends set at issuance, and are paid before common stock dividends
• Ownership does not allow voting rights
• Dividends set at issuance, and are paid before common stock dividends
• Ownership does not allow voting rights
• Ownership that allows voting rights• Can be bought and sold (liquidity) • May pay dividends
• Ownership that allows voting rights• Can be bought and sold (liquidity) • May pay dividends
Copyright © 2011 by Nelson Education Ltd.
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Bonds
BondsBondsBondsBonds
Long-term debt obligationsLong-term debt obligations
Principal – par valuePrincipal – par value
Interest – coupon rateInterest – coupon rate
Copyright © 2011 by Nelson Education Ltd.
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Types of Bonds
GovernmentGovernment
High-yield (junk) bondsHigh-yield (junk) bonds
Convertible bondsConvertible bonds
CorporateCorporate
Mortgage bondsMortgage bonds
DebenturesDebentures
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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Appeal of Mutual Funds
Good way to hold a diversified, less risky, portfolio
Professional management
May offer higher returns
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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
Copyright © 2011 by Nelson Education Ltd.
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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?
Copyright © 2011 by Nelson Education Ltd.
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Copyright © 2008 by Nelson, a division of Thomson Canada Limited 24
TSX Index 2004 - 2008
Bull market
Bear market
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Changing the Way We BankChanging the Way We Bank
Trends in Financial Institutions
regulationsservices offered
Copyright © 2011 by Nelson Education Ltd.
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