Lesson 6 - Intro to Finance Textbook Reading Flashcards
Which sector is the primary provider of funds to businesses and government?
household sector
What is the household sector comprised of?
all persons and unincorporated businesses in Canada
How is finance different from economics?
Economics deals with scare resource allocation, whereas finance deals with that but ALSO the TERMS by which they are allocated and through what CHANNELS
What are the dangers of looking at only a country’s balance sheet?
It only shows the MEASURABLE wealth of a country, not including human capital (skills, labour, etc.)
Why does Canada’s balance sheet ‘remove things that are of interest to finance students’?
Because Canada’s B/S nets out ALL the debts Canadians owe to other Canadians (which is almost all of the debt)
real assets
tangible things that compose personal and business assets
financial assets
a claim that one individual or institution has on another (what one individual has lent to another)
financial intermediaries
entities that invest funds on behalf of others and change the nature of the transactions (transform the nature of the securities they issue and invest in)
market intermediaries
entities that facilitate the working of markets and help provide direct intermediation but DO NOT change the nature of the transaction; AKA brokers (they simply make the markets work better)
intermediation
the transfer of funds from lenders to borrowers
What are residential structurers, property, major appliances, cars, and office towers all examples of?
Real assets
What are consumer credit, loans, and mortgages examples of?
Financial assets
What can major appliances and cars also be referred to? Why?
Consumer durables, because they last for many years
What are transactions made through market intermediaries called?
“agency transactions”, bc market intermediaries are agents
What are transactions made through financial intermediaries called?
“principal transactions”, bc the financial intermediary acts as a principal on its own behalf rather than as an agent on behalf of its clients
What are the market segments called when market intermediaries help individuals? When they help financial intermediaries?
retail market; institutional market
credit crunch
a situation in which financial intermediaries have to raise the cost of their loans by a significant amount due to their own inability to raise financing on reasonable terms
What are insurance companies and pension funds classified as?
contractual savers (always have a steady flow of money)
Which insurance company invested in exotic financial securities issued by major U.S. banks? What did this force the gov’t to do?
American International Group (AIG) ; forced gov’t to inject 170US billion into AIG to “rescue” it, otherwise its collapse would have dwarfed that of Washington Mutual and Lehman Brothers (bankruptcy during 2008 recession)
What are the two major functions that mutual funds perform?
1) pool small sums of money so they can make investments that would not be possible for smaller investors, and 2) offer professional expertise in the management of those funds
Crown corporations
government-owned companies that provide goods and services needed by Canadians
Gambling, alcohol, and cigarettes are often called what?
“sin taxes”; gov’t has power to raise money from citizens so they do this through direct taxation or monopolizing and charging highers fees for things people want
Why is government debt generally regarded as “default free”?
bc it is the only debt that people can invest in and know for sure they will get the promised payments. in this sense, deposits in banks are also default free (up to certain limits) bc they are insured by gov’t!
debt instruments
legal obligations to repay borrowed funds at a specified maturity date and to provide interim interest payments
equity instruments
ownership stakes in a company
common shares
an equity instrument that represents part ownership in a company and usually gives voting rights on major decisions affecting the company
preferred shares
equity instruments that usually entitle the owner to fixed dividend payments that must be made before any dividends are paid to common shareholders
non-marketable financial assets
invested funds that are available on demand in instruments that are not tradable
marketable financial assets
those assets that can be traded among market participants
money market securities
short-term debt instruments (treat like cash)
capital market securities
debt securities with maturities greater than one year, and includes equity securities (represent ownership in a company and generally have no maturity date)
primary markets
markets that involve the issue of new securities by the borrower in return for cash from investors (lendors) - KEY to the wealth creation process
secondary markets
trading (or market) environments that permit investors to buy and sell existing securities
Money market trading is dominated by?
governments, financial institutions, and large corporations
Money market instruments and long-term debt instruments trade in what markets?
dealer markets (some l/t instruments traded on exchanges tho)
Which market is larger when trading in equity securities? In debt securities?
equity: secondary market many times the size of primary markets; debt: primary market > secondary
Toronto Stock Exchange (TSX)
the major stock exchange in Canada, where most equity security transactions take place; it is the official exchange for trading Canadian senior securities
Montreal Exchange (ME)
the exchange that acts as the Canadian national derivatives market and carries on all trading in financial futures and options
What are market intermediaries now called as a result of global competition to listing and trading securities increasing?
“participating organizations” or “approproved participants” ; they also do not have to own seats in order to trade on the exchange
market capitalization
the total market value of the common equity of an entity
Ontario Securities Commission (OSC)
an agency created by the Ontario government to protect investors in securities transactions
CNSX Markets Inc.
an alternative market for small emerging companies
third market
the trading of securities that are listed on organized exchanges in the OTC market
fourth market
the trading of securities directly between investors without the involvements of brokers or dealers
New York Stock Exchange
the world’s largest stock market
What happens as trading becomes computerized?
barriers between markets get smaller
T or F: Business finance is not a subset of finance.
False. There is only ONE finance, business is simply a subset of finance.
What were some of the factors that resulted in the 2008 crisis?
abnormally large defaults on mortgage loans, which in turn was caused by poor lending practices in prior periods and a subsequent (and ongoing) decline in real estate prices
What are the two sectors that are normally regarded as the lowest risk in the financial market, but ended up generating problems of significant uncertainty?
household mortgages and government debt
