Chapter 18 18 Chapter Understanding Money Financial Institutions

Chapter 18 18 Chapter Understanding Money, Financial Institutions, and the Securities Markets Prepared by Norm Althouse University of Calgary Copyright © 2008 by Nelson, a division of Thomson Canada Limited 1

1 Characteristics of Money Scarcity Durability Portability Chapter 18 Divisibility Copyright © 2008 by Nelson, a division of Thomson Canada Limited 2

Functions of Money 1 Medium of Exchange Functions of Money Standard of Value Chapter 18 Store of Value Copyright © 2008 by Nelson, a division of Thomson Canada Limited 3

The Canadian Money Supply Chapter 18 1 Currency Coins and Paper Money Demand Deposits Money in chequing accounts Can be withdrawn on demand Time Deposits Pay interest Cannot be withdrawn on demand Copyright © 2008 by Nelson, a division of Thomson Canada Limited 4

2 The Bank of Canada Activities conducts monetary policy supplies quality bank notes Chapter 18 funds-management services promotes safety and efficiency of Canada’s financial system Copyright © 2008 by Nelson, a division of Thomson Canada Limited 5

2 Carrying Out Monetary Policy Open Market Operations Tools used by the Bank of Canada Chapter 18 Target for the overnight rate Copyright © 2008 by Nelson, a division of Thomson Canada Limited 6

Chapter 18 2 Carrying Out Monetary Policy Open Market Operations Purchase and sale of Canadian government securities Target for the Overnight Rate Signal to the major participants in the money market as to borrowing rates Copyright © 2008 by Nelson, a division of Thomson Canada Limited 7

Financial Institutions 3 Chapter 18 Depository Institutions Nondepository Institutions Chartered Banks Insurance Companies Trust Companies Pension Funds Credit Unions or Caisses Populaires Copyright © 2008 by Nelson, a division of Thomson Canada Limited Brokerage Firms Finance Companies 8

4 Insuring Deposits Canada Deposit Insurance Corporation (CDIC) Federal Crown Corporation Accountable to Canada’s Parliament > Minister of Finance Chapter 18 Insures eligible deposits to the value of $100, 000 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 9

International Banking The Role of Canadian Banks 5 Chapter 18 Provide Loans Offer Trade. Related Services § Provide global cash management services § Help firms manage cash flows § Improve their payment efficiency § Reduce exposure to operational risks Copyright © 2008 by Nelson, a division of Thomson Canada Limited 10

Stocks and Bonds 6 Chapter 18 Securities Investment certificates that represent either equity or debt Shares • Ownership that allows voting rights • Can be bought and sold (liquidity) • May pay dividends Bonds • Dividends set at issuance, and are paid before common stock dividends • Ownership does not allow voting rights Copyright © 2008 by Nelson, a division of Thomson Canada Limited 11

Bonds 7 Long-term debt obligations Bonds Principal – par value Chapter 18 Interest – coupon rate Copyright © 2008 by Nelson, a division of Thomson Canada Limited 12

Types of Bonds 7 Government Corporate High-yield (junk) bonds Mortgage bonds Chapter 18 Debentures Convertible bonds Copyright © 2008 by Nelson, a division of Thomson Canada Limited 13

Other Types of Securities 8 Mutual Fund Financial-services company that pools investors’ funds to buy a selection of securities Legally binding obligations to buy or sell commodities or Futures Contracts financial instruments at later date Chapter 18 Options Contracts to buy or sell quantities of common stocks or financial instruments at later date Copyright © 2008 by Nelson, a division of Thomson Canada Limited 14

8 Appeal of Mutual Funds § Good way to hold a diversified, less risky, portfolio § Professional management Chapter 18 § May offer higher returns Copyright © 2008 by Nelson, a division of Thomson Canada Limited 15

Securities Market Chapter 18 9 Investment Bankers Help companies raise long-term financing, a process called underwriting Stockbroker A person licensed to buy and sell securities on behalf of clients Online Investing Improvement in Internet technology Copyright © 2008 by Nelson, a division of Thomson Canada Limited 16

Types of Markets Chapter 18 9 Primary Market New securities are sold to the public Secondary Market Old (already issued) securities are bought and sold, or traded, among investors Copyright © 2008 by Nelson, a division of Thomson Canada Limited 17

Buying and Selling at Securities Exchanges 10 Organized Stock Exchanges Types of Securities Markets Chapter 18 Over-the-Counter Market Copyright © 2008 by Nelson, a division of Thomson Canada Limited 18

The Over-the-Counter Market 10 Over-the-Counter (OTC) Market Chapter 18 NASDAQ A telecommunications network that links dealers and enables them to trade securities. The first electronic-based stock market and the fastest growing part of the stock market. Copyright © 2008 by Nelson, a division of Thomson Canada Limited 19

Bull or Bear Market? Chapter 18 10 Bull Market Prices rise. Better returns. Bear Market Prices go down. Low, or negative, returns. Copyright © 2008 by Nelson, a division of Thomson Canada Limited 20

TSX Index 2004 - 2008 Bull market Chapter 18 Bear market Copyright © 2008 by Nelson, a division of Thomson Canada Limited 21

1 1 Trends in Financial Institutions Growth of Mega-Financial Institutions Integration of Banking, Brokerage, and Insurance Chapter 18 Delivery of Services with “Clicks and Bricks” Copyright © 2008 by Nelson, a division of Thomson Canada Limited 22