Chapter 18 1 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Chapte r Understanding Money, Financial Institutions, and the Securities Markets Prepared by Norm Althouse University of Calgary 18
Dec 25, 2015
Ch
apte
r 18
1Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Chapter
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
18
Ch
apte
r 18
2Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Characteristics of Money1
DivisibilityDivisibility
PortabilityPortability
DurabilityDurability
ScarcityScarcity
Ch
apte
r 18
3Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Functions of Money1
Medium of ExchangeMedium of Exchange
Standard of ValueStandard of Value
Store of ValueStore of Value
FunctionsFunctionsof Moneyof Money
FunctionsFunctionsof Moneyof Money
Ch
apte
r 18
4Copyright © 2008 by Nelson, a division of Thomson Canada Limited
The Canadian Money Supply1
Time DepositsTime Deposits Pay interest Cannot be withdrawn on demand
Pay interest Cannot be withdrawn on demand
Demand DepositsDemand Deposits Money in chequing accountsCan be withdrawn on demandMoney in chequing accountsCan be withdrawn on demand
CurrencyCurrency Coins and Paper MoneyCoins and Paper Money
Ch
apte
r 18
5Copyright © 2008 by Nelson, a division of Thomson Canada Limited
2 The Bank of Canada Activities
funds-management services funds-management services
supplies quality bank notes supplies quality bank notes
conducts monetary policy conducts monetary policy
promotes safety and efficiency promotes safety and efficiency of Canada’s financial systemof Canada’s financial system
Ch
apte
r 18
6Copyright © 2008 by Nelson, a division of Thomson Canada Limited
2 Carrying Out Monetary Policy
Tools usedTools usedby the Bankby the Bankof Canadaof Canada
Tools usedTools usedby the Bankby the Bankof Canadaof Canada
Target for the overnight rateTarget for the overnight rate
Open Market OperationsOpen Market Operations
Ch
apte
r 18
7Copyright © 2008 by Nelson, a division of Thomson Canada Limited
2 Carrying Out Monetary Policy
Open Market OperationsOpen Market Operations Purchase and sale of Canadian government securities
Purchase and sale of Canadian government securities
Signal to the major participants in the money market as to
borrowing rates
Signal to the major participants in the money market as to
borrowing rates
Target for the Overnight Rate
Target for the Overnight Rate
Ch
apte
r 18
8Copyright © 2008 by Nelson, a division of Thomson Canada Limited
3 Financial Institutions
NondepositoryInstitutions
NondepositoryInstitutions
DepositoryInstitutions DepositoryInstitutions
Insurance Companies Insurance Companies
Pension Funds Pension Funds
Brokerage Firms Brokerage Firms
Finance Companies Finance Companies
Chartered BanksChartered Banks
Trust CompaniesTrust Companies
Credit Unions orCaisses Populaires
Credit Unions orCaisses Populaires
Ch
apte
r 18
9Copyright © 2008 by Nelson, a division of Thomson Canada Limited
4 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)
Ch
apte
r 18
10Copyright © 2008 by Nelson, a division of Thomson Canada Limited
5
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 BankingThe Role of Canadian Banks
Ch
apte
r 18
11Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Stocks and Bonds6
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
Ch
apte
r 18
12Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Bonds7
BondsBondsBondsBonds
Long-term debt obligationsLong-term debt obligations
Principal – par valuePrincipal – par value
Interest – coupon rateInterest – coupon rate
Ch
apte
r 18
13Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Types of Bonds7
GovernmentGovernment
High-yield (junk) bondsHigh-yield (junk) bonds
Convertible bondsConvertible bonds
CorporateCorporate
Mortgage bondsMortgage bonds
DebenturesDebentures
Ch
apte
r 18
14Copyright © 2008 by Nelson, a division of Thomson Canada Limited
8 Other Types of Securities
Mutual FundMutual Fund
Futures ContractsFutures Contracts
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
OptionsOptionsContracts 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
Ch
apte
r 18
15Copyright © 2008 by Nelson, a division of Thomson Canada Limited
8 Appeal of Mutual Funds
Good way to hold a diversified,less risky, portfolio
Professional management
May offer higher returns
Ch
apte
r 18
Improvement in Internet technology
Improvement in Internet technology
16Copyright © 2008 by Nelson, a division of Thomson Canada Limited
9 Securities Market
Help companies raise long-term financing,
a process calledunderwriting
Help companies raise long-term financing,
a process calledunderwriting
InvestmentBankers
InvestmentBankers
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
Ch
apte
r 18
17Copyright © 2008 by Nelson, a division of Thomson Canada Limited
9 Types of Markets
SecondaryMarket
SecondaryMarket
Old (already issued) securitiesare bought and sold, or traded,
among investors
Old (already issued) securitiesare bought and sold, or traded,
among investors
PrimaryMarket
PrimaryMarket
New securities are sold to the public
New securities are sold to the public
Ch
apte
r 18
18Copyright © 2008 by Nelson, a division of Thomson Canada Limited
10
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 atSecurities Exchanges
Ch
apte
r 18
19Copyright © 2008 by Nelson, a division of Thomson Canada Limited
10
A telecommunications network that links dealersand enables them totrade securities.
A telecommunications network that links dealersand enables them totrade securities.
Over-the-Counter(OTC)Market
Over-the-Counter(OTC)Market
The first electronic-basedstock market and the fastest growing part of thestock market.
The first electronic-basedstock market and the fastest growing part of thestock market.
NASDAQNASDAQ
The Over-the-Counter Market
Ch
apte
r 18
20Copyright © 2008 by Nelson, a division of Thomson Canada Limited
10
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?
Ch
apte
r 18
TSX Index 2004 - 2008
21Copyright © 2008 by Nelson, a division of Thomson Canada Limited
Bull market
Bear market
Ch
apte
r 18
22Copyright © 2008 by Nelson, a division of Thomson Canada Limited
11
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
Trends in Financial Institutions