1.5 - Financial Markets and the Corporation

Question 1

DIAGRAM: Explain the cash flows between the firm and the financial markets

Answer 1

(A) the firm borrows money from the financial markets
(B) the firm uses the money to finance the purchase of assets
(C) cash is generated from those assets
(D) cash generated goes to paying taxes
(E) cash generated is reinvested in the company
(F) cash generated goes back to repaying the debt in the financial markets

Question 2

Money Markets vs. Capital Markets

Answer 2

Money Markets:
- where short term debt securities (money market instruments) are bought and sold
- money market instruments are essentially IOUs (a signed document acknowledging a debt)
- this is a dealer market

Capital Market:
- where long-term debt and equity securities are bought and sold
- ie. TSX

Question 3

Examples of Money Market Instruments

Answer 3

Money Market Instruments are short-term debt securities

Examples:
- Bankers’ Acceptance (BA)
- Treasury Billls (T-Bills)
-

Treasury bills are a short term debt of the Government of Canada

Question 4

What is a Bankers’ acceptance (BA)

Answer 4

a short term debt issued by a company and guaranteed by a bank

a buyer buys goods from a seller and seeks financing from a bank
the buyer applies for a BA, which means the bank agrees to pay the seller at a future date
the seller

The bank is guaranteeing to pay the seller
the buyer has the obligation to pay back the amount of the BA plus interest payments to the bank

Question 5

What is the difference between a dealer and a broker/agent

Answer 5

Dealer:
- someone who buys something then sells it to others

Broker:
- do not actually own the security - they just facilitate the salae

Question 6

Who are the largest money market dealers?

Answer 6

• chartered banks
• investment dealers

Question 7

Distinguish between a primary and secondary market

Answer 7

Primary Market:
- the original sale

Secondary Market:
- securities are bought and sold after the original sale
- secondary markets allow for transfer of ownership of a firm

Question 8

Explain the process of issuing equity or debt securities

Answer 8

• most publicly offered equity and debt securities are underwritten
• the investment dealer is called the underwritter, or a group of them is called an underwriting syndicate
• the underwriters hope to profit by reselling the securities at a higher price than they paid to the firm for them

Question 9

By law, Public Offerings of debt and equity securities must be registered with:

Answer 9

the provincial authorties
- in Ontario this is the Ontario Securities Commusion (OSC)

Question 10

How do some companies get around the regulatory requirements and expenses of public offerings

Answer 10

they may choose to sell securities privately to large financial institutions (ie. insurance companies)

Question 11

Examples of big Investment Dealers

Answer 11

• RBC Capital Markets
• Scotia Global Banking and Markets
• BMO Capital Markets
• CIBC Capital Markets

Question 12

2 types of secondary markets and exmamples of each type

Answer 12

1. auction market
   - ie. Toronto Stock Exchange (TSX)
2. Dealer Markets/Over the Counter (OTC) Markets
   - dealer markets in long-term equity and debt
   - includes all bonds and certain illiquid stocks

Question 13

Why may a smaller company be listed on TSX Venture Exchange rather than TSX

Answer 13

TSX has the most strict regulatory requirements
TSX Venture Exchange has less requirements making it easier for smaller firms to be listed on there