Chapter 9.4 Flashcards
Financial Instruments and Markets
1
Q
What is the next step after looking at the biggest borrowers and lenders in Canada, and seeing how financial intermediaries coexist alongside market intermediaries to help the intermediation process?
A
Look at the instruments and institutional arrangements that are used to transfer these funds
2
Q
What are financial assets?
A
Formal legal documents that set out the rights and obligations of all the parties involved
3
Q
What are the 2 major categories of financial securities?
A
- Debt instruments
- Equity instruments
4
Q
What are debt instruments?
A
Legal obligations to repay borrowed funds at a specified maturity date and to provide interim interest payments
5
Q
What are equity instruments?
A
Ownership stakes in a company
6
Q
What do debt instruments represent?
A
Legal obligations to repay borrowed funds at a specified maturity date
7
Q
What do debt instruments provide?
A
Provide interim interest payments as specified in the agreement
8
Q
What are some of the most examples of debt instruments?
A
Bank loans, commercial paper, bankers’ acceptances (BAs), treasury bills (T-bills), mortgage loans, bonds, and debentures
9
Q
What do equity instruments represent?
A
An ownership stake in a company
10
Q
What is the most common form of equity?
A
Common share
11
Q
What is a common share?
A
An equity instrument that represents part ownership in a company and usually gives voting rights on major decisions affecting the company
12
Q
Besides common shares, what other type of equity instrument may companies also issue?
A
Preferred shares
13
Q
What are preferred shares?
A
Equity instruments that usually entitle the owner to fixed dividend payments that must be made before any dividends are paid to common shareholders
14
Q
Aside from the debt vs. equity distinction, what other ways can financial instruments be categorized as?
A
To distinguish between non-marketable financial assets and marketable financial assets
15
Q
What are the most familiar forms of non-marketable assets?
A
Savings accounts or demand deposits with financial institutions such as chartered banks
16
Q
How is the availability like for funds invested in savings accounts or demand deposits with financial institutions?
A
Available on demand which guaranteed the liquidity of these investments
17
Q
Are non-marketable financial assets able to be sold to other people?
A
No, you have to first withdraw the funds then transfer the cash
18
Q
Besides savings accounts and demand deposits, what other non-marketable financial assets was widely used in Canada?
A
The Canada Savings Bond (CSB) and its provincial counterparts
19
Q
Who were the Canada Savings Bond (CSB) issued by?
A
The federal or provincial governments
20
Q
Why are Canada Savings Bond (CSB) called non-marketable?
A
Because unlike traditional bonds, they’re not tradable
21
Q
How can CSB (Canada Savings Bond)s be cashed out?
A
By the owner at full par value plus eligible accrued interest at any bank in Canada at any time
22
Q
Are Canada Savings Bonds still held by investors and being issued?
A
Many CSBs are still held by investors but they are no longer being issued as of November, 2017
23
Q
What are non-marketable financial assets?
A
Invested funds that are available on demand in instruments that are not tradable
24
Q
What are marketable financial assets?
A
Those assets that can be traded among market participants
25
How are market securities typically categorized?
- According to whether they're debt or equity securities
- Term to maturity (time until obligation must be repaid)
26
What are money market securities?
Short-term debt instruments (i.e. maturities less than one year)
27
What is considered short term for money market securities?
Maturities less than one year
28
29
What are examples of money market securities?
T-bills, commercial paper, and BAs
30
What are capital market securities?
Debt securities with maturities greater than one year, and equity securities
31
What are examples of capital market securities?
Bonds, debentures, and so on
32
What other type of securities do capital market securities also include?
Equity securities
33
What do equity securities represent
Ownership in a company and generally have no maturity date
34
How do governments raise new financing?
Via the debt markets
35
How do governments raise new financing for short-term financing?
Issue T-bills
36
How do governments raise new financing for long term financing?
Issue traditional bonds and CSBs
37
How do businesses raise short-term financing?
- In the form of debt thru loans
- By issuing commercial paper, BAs, etc.
38
How do businesses raise long-term financing?
In the form of debt OR in the form of equity
39
How do businesses raise long-term financing in the form of debt?
- Loans
- Issuing bonds
- Using other long-term debt instrument
40
How do businesses raise long-term financing in the form of equity?
Issuing common shares or preferred shares
41
How do financial markets play a critical role in any open economy?
Facilitating the transfer of funds from lenders to borrowers
42
What happens when financial markets are efficient?
Funds being transferred from lenders to borrowers will be allocated to those who have the most productive use for them
43
What are primary markets?
Markets that involve the issue of new securities by the borrower in return for cash from investors (or lenders)
44
Give 2 examples of primary market transactions. How are they examples of primary market transactions?
- Government sells new issues of T-bills or bonds
- Company sells new common shares to the public
* New securities are created, and borrowing entity raises monies it can spend
45
Why are primary markets the key to the wealth creation process?
They enable money to be transferred to those who can make best use of it in terms of developing new real assets (ex. houses & factories)
46
Primary markets will not work properly without well-functioning ___________
Secondary markets
47
What are secondary markets?
Trading (or market) environments that permit investors to buy and sell existing securities
48
Why are secondary market services critical to the functioning of the primary markets?
Governments and companies wouldn't be able to raise financing if investors were unable to sell their investments when necessary
49
What is an example of how investors could be be reluctant to sell their investments if secondary markets didn't exist?
Buying a 20-year corporate bond worth $1,000, or $1,000 worth of a company’s common shares, if they knew they would be unable to sell these securities when they needed to raise money quickly or when they became nervous about the company’s future prospects
50
What are the 2 major types of secondary markets?
1. Exchanges or auction markets
2. Dealer or over-the-counter (OTC) markets
51
What are exchanges or auction markets?
Secondary markets that involve a bidding process that takes place in a specific location
52
What are dealer or over-the-counter (OTC) markets?
Secondary markets that don't have a physical location and consist of a network of dealers who trade directly with one another
53
Why have exchanges been referred to as auction markets?
Because they involve a bidding process that takes place in a specific location (i.e., similar to an auction)
54
How can investors (both buyers and sellers) be represented at exchanges/auction markets?
Brokers
55
What are brokers?
Market intermediaries who facilitate the sale of financial securities and help to make the market work
56
How are OTC or dealer markets different from exchanges/auction markets?
Don't have a physical location, but rather consist of a network of dealers who trade directly with one another
57
How has the distinction between dealer markets and exchanges/auction markets changed in recent years?
Has become blurred because trading on most of the major exchanges in the world is now fully computerized, making the physical location of the exchanges of little consequence
58
How has the amount of direct haggling between dealers been reduced in OTC markets?
Have become increasingly automated
59
Where do money market instruments trade in?
Dealer markets
60
How large do money market instruments tend to be and what sizes are they issued in?
Very large and issued in sizes of $100,000+
61
Due to money market instruments being very large, who is the trading dominated by?
Governments, financial institutions, and large corporations
62
Where are long-term debt instruments such as bonds primarily traded through?
Dealer markets, although some are traded one exchanges
63
What are the major financial securities issued by corporations and what do they represent in a firm?
Equity securities generally, and they represent a proportionate ownership (share) in a firm
64
How do debt securities and common shares differ from eachother?
Debt securities: normally paid back and result in constant refinancing activity
Common shares: generally issued once and then stay outstanding indefinitely
65
How does the size of secondary market trading in equity securities compare to the size of the primary market?
Trading in equity securities: Secondary market is many times the size of the primary market
Debt securities: the opposite
66
Where do the overwhelming majority of equity market transactions take place through?
A stock exchange, although there's a small OTC equity in Canada
67
Have changes taken place in the major stock exchanges over the past 2 decades both at home and abroad?
Dramatic changes
68
What 5 stock exchanges did Canada have at the start of 1999?
1. Toronto Stock Exchange or TSX (formerly called the TSE)
2. Montreal Exchange (ME)
and 3 others in Vancouver, Winnipeg, and Alberta
69
In what year(s) did an overhaul of Canada's previous stock exchange structure occur? What happened?
1999-2000: overhaul of structure resulting in only 2 Canadian stock exchanges:
1. TSX
2. Newly created TSX Venture Exchange (TSVX)
70
Who were both of the exchanges of the 1999-2000 Canadian stock exchange system owned by? When did they become publicly listed?
A newly formed company: the TSX Group Inc., publicly listed in 2002
71
When and who was the Winnipeg Commodity Exchange acquired by?
September 2007 by Intercontinental Exchange (ICE), now called ICE Futures as it's expanded its trading to include agricultural contracts
72
On December 10, 2007, what happened between the Montreal Exchange and the TSX Group?
Announced an agreement to combine both institutions to form the TMX Group INC., which was completed on May 1, 2008
73
When and with what acquisition was the new company TMX Group Limited formed?
In 2012, with the acquisition of Canadian Depository for Securities Limited (CDS), Alpha Trading Systems Inc., and Alpha Trading Systems Limited Partnership (collectively Alpha) in August, and TMX Group Inc. in September
74
What is the Toronto Stock Exchange or TSX?
The major stock exchange in Canada, where most equity security transactions take place; it's the official exchange for trading Canadian senior securities
75
What is the TSX Venture Exchange (TSVX)?
The stock exchange for trading the securities of emerging companies not listed on the TSX
75
What is TMX Group Limited?
The company that owns the TSX, the TSXV, the ME, CDS, and Alpha, as well as several other related subsidiaries
76
What has the Montreal Exchange (ME) functioned as since March 2000 and what does it now do?
The Canadian national derivatives market, it now carries on all trading in financial futures and options in Canada
77
Where is equity trading now concentrated on and why?
The TSX and TSVX, where oversight and regulation can be more uniformly implemented
78
What is the Montreal Exchange (ME)?
The exchange that acts as the Canadian national derivatives market and carries on all trading in financial futures and options
79
What happened to the TSX on April 23, 1997?
Closed its trading floor, and trading is now mostly computerized
80
When do brokers do based on their client orders?
Enter orders to either buy/sell and computer matches buyers with sellers
81
At the end of 2018 how many issuers were listed in Canada on the TSX and the TSVX, and with what market capitalization?
3,470 issuers
Market capitalization: ~C$2.99 trillion
82
Where are many of the larger firms on the TSX and TSVX also listed on?
U.S. markets
83
What is the barometer that measures the state of the Canadian equity markets?
The Standard & Poor's/Toronto Stock Exchange (S&P/TSX) Composite Index (formerly known as the TSE 300 Composite Index)
84
How many companies does the S&P/TSX currently comprise of?
~250 companies
85
What is the S&P/TSX Composite Index and who is it maintained by?
It's the TSX's major stock market index and is maintained by Standard & Poor's
86
What is Standard & Poor's?
A major U.S. company that maintains the S&P/TSX Composite Index and also the S&P 500 Index (one of the major indexes of the U.S. stock market)
87
What is market capitalization?
The total market value of the common equity of an entity
88
What should be noted of the S&P/TSX Composite Index in May 2008?
Reached a month-end high (at the time) of 14,714.73. Then it was caught in the worldwide decline in equity markets as the U.S. banking system verged on collapse
89
What had the TSX declined to by month-end February 2009?
8,123.02, over 45% down from its month-end high less than a year earlier
90
Globally, how much market capitalization had disappeared with the 2008-2009 decline in stock markets around the world?
Almost US $15 trillion
91
What were stock markets around the globe like by the end of April 2015?
Exceeded their pre-crisis levels
Canada: S&P/TSX Index exceeding 15,000
92
As of February 2, 2019. what did Canada's TSX stand at?
15, 937
93
What was the total value of Canada's stock market as of December 18, and how did it rank relative to other global stock exchanges?
Just under US$2 trill, ranked 11th
94
Until recently Canada's stock market was the 6th largest, how did that change to 11th?
Dramatic increase in size of Chinese markets:
- Traditional Hong Kong markets (#5)
- Newer mainland China market in Shanghai (#4)
Both becoming larger than the TMX
So has
- Mainland China's 2nd largest stock market, Shenzhen (#8)
And more recently 2 markets in India
95
What is the world's biggest market?
The New York Stock Exchange
96
How much total market capitalization does the NYSE together with the Nasdaq have?
Over US$30.4 trill
97
What is the normal rule of thumb of the size of Canada's stock market relative to the size of the US?
Canada is 1/10 the size of the US suggests that Canada's stock market is pretty significant, even if it's presently slightly below this figure
98
In addition to listing on an organized stock exchange, where can common shares also be traded in?
OTC or unlisted markets
99
Where do Canadian OTC equities trade on?
The Canadian Securities Exchange (CSE)
100
Who is the Canadian Securities Exchange (CSE) operated by?
CNSX Markets Inc.
101
How has the Canadian Securities Exchange (CSE) grown as of December 2018?
Grown steadily and listed over 460 securities
102
What is the Canadian Securities Exchange (CSE)?
An alternative market for small emerging companies
103
How strict are the requirements to trade on the Canadian Securities Exchange (CSE)?
Less stringent than those for the TSX Venture Exchange
104
In addition to the primary and secondary markets, what 2 others markets are there?
Third and fourth markets
105
What is the third market?
The trading of securities that are listed on organized exchanges in the OTC market
106
What is the fourth market?
The trading of securities directly between investors without the involvement of brokers or dealers
107
Historically, what has the third market been particularly important for?
Block trades
108
What are block trades?
Extremely large transactions involving at least 10,000 shares or $100,000
109
What type of investors use the fourth market to trade?
Usually large institutions
110
What does the fourth market operate through?
Privately owned automated systems
111
What are the 2 most widely recognized 4th market systems?
1. Instinet (institutional Network) which is owned by Reuters
2. Alpha (now part of the TMX Group Limited)
