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ch01 On School Work
CORPORATE FINANCE
Laurence Booth W. Sean Cleary
Prepared by
Ken Hartviksen
CHAPTER 1
An Introduction to Finance
Lecture Agenda
Learning Objectives
Important Terms
Finance Defined
Real versus Financial Assets
The Financial System
Financial Instruments and Markets
The Global Financial Community
Summary and Conclusions
Concept Review Questions
CHAPTER 1 - An Introduction to Finance
1-3
Learning Objectives
1.
2.
3.
4.
5.
6.
1-4
Key Terms
Bourse de Montral
brokers
Canadian Trading and Quotation System Inc. (CNQ)
capital market securities
common share
corporate finance
Crown corporations
dealer or over-the-counter (OTC) markets
debt instruments
equity instruments
exchanges or auction markets
finance
financial assets
financial intermediaries
fourth market
intermediation
investments
CHAPTER 1 - An Introduction to Finance
1-5
Key Terms
market capitalization
market intermediary
marketable financial assets
money market securities
New York Stock Exchange (NYSE)
non-marketable financial assets
Ontario Securities Commission
preferred shares
primary markets
real assets
secondary markets
third market
Toronto Stock Exchange (TSX)
TSX Group Inc.
TSX Markets
TSX Venture Exchange
Winnipeg Commodity Exchange
CHAPTER 1 - An Introduction to Finance
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What Is Finance?
Finance is the study of how and under what
terms savings (money) are allocated between
lenders and borrowers.
Finance is distinct from economics in that it
addresses not only how resources are allocated but
also under what terms and through what channels
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1-8
1-9
Liabilities
$ Billion
Consumer credit
260
Loans
131
Mortgages
588
Total Liabilities
979
So urce: Statistics Canada. Natio nal B alance Sheet A cco unts, Quarterly Estimates, Fo urth
Quarter 2005. Ottawa: M inister o f Industry, 2006 (Catalo gue No . 13-214-XIE).
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1 - 11
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Channels of Intermediation
FIGURE 1-3
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Financial Intermediaries
Canadian Chartered Banks
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Financial Intermediaries
Canadian Chartered Banks
Bank
Royal Bank of Canada
Canadian Imperial Bank of Commerce
(CIBC)
Bank of Nova Scotia
TD Canada Trust
Bank of Montreal
National Bank
Revenue
Assets
Profits
($ million) ($ million) ($ million)
29,403
469,521
3,387
18,677
18,332
18,665
15,138
5,320
280,370
314,025
365,210
297,532
107,598
-32
3,209
2,229
2,400
855
So urce: B M O Investo rLine website: www.bmo investo rline.co m, Octo ber 31, 2006.
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Financial Intermediaries
Insurance Companies
Insurers sell policies and collect premiums from customers
based on the pricing of those policies given the probability of a
claim and the size the policy and administrative fees.
They invest the premiums so that the accumulated value in the
future will grow to meet the anticipated claims of the
policyholders.
In this way, unsupportable risks (such as the death of wage
earner or the burning down of a business) are shared among a
large number of policyholders through the insurance company.
Insurance allows households, business and government to
engage in risky activities without having to bear the entire risk of
loss themselves.
CHAPTER 1 - An Introduction to Finance
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Financial Intermediaries
Insurance Companies
Insurer
Manulife Financial
Sun Life Financial
Great-West Lifeco
ING Canada
Revenue
Assets
Profits
($ million) ($ million) ($ million)
32,187
322,171
3,294
21,871
171,850
1,867
23,883
102,161
1,775
4,446
9,926
782
So urce: Data fro m B M O Investo rLine website: www.bmo investo rline.co m, Octo ber 31, 2006.
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Financial Intermediaries
Pension Plan Assets
Individuals and employers make payments over the
entire working life of a person with those funds
invested to grow over time.
Ultimately, the accumulated value in the pension can
be used by the person in retirement.
Pension plans accumulate considerable sums of
money, and their managers invest those funds with
long-term investment time horizons in diversified
portfolios of investments. These investments are a
major source of capital, fuelling investment in
research and development, capital equipment,
resource exploration and ultimately contributing in a
substantial way to growth in the economy.
CHAPTER 1 - An Introduction to Finance
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Financial Intermediaries
Pension Plan Assets
Net Assets
($ billion)
216.1
98.0
96.1
41.6
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Financial Intermediaries
Canadian Mutual Fund Assets
Mutual funds give small investors access to diversified,
professionally-managed portfolios of securities.
Small investors often do not have the funds necessary to
invest directly into market-traded stocks and bonds.
This is called denomination intermediation because the
mutual fund makes investments available in smaller,
more affordable amounts of money.
Canadian indirect investment in the markets through
managed products such as mutual funds and segregated
funds has grown exponentially.
(see Figure 1-4 on the next slide)
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Financial Intermediaries
Canadian Mutual Fund Assets
FIGURE 1-4
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Public Debt
Governments
Federal
Provincial
Municipal
Crown Corporations
Private Debt
Households
Non-financial Corporations
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Non-financial Companies
General Motors of Canada Ltd.
Loblaw Companies Ltd.
Magna International Inc.
Imperial Oil Ltd.
Alcan Inc.*
BCE Inc.
Bombardier Inc.*
Petro-Canada
Onex Corp.
EnCana Corp.*
Revenue
Assets
($ million) ($ million)
34,991
n/a
27,812
13,761
22,873
12,321
26,936
15,582
20,408
26,638
19,150
40,630
14,882
17,483
17,673
20,655
17,626
14,845
14,322
34,148
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Financial Instruments
Commercial paper
Bankers acceptances
Treasury bills
Mortgage loans
Bonds
Debentures
2. Equity Instruments
Common stock
Preferred stock
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Financial Instruments
Non-marketable
Savings accounts
Term Deposits
Guaranteed Investment Certificates
Canada Savings Bonds
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Financial Instruments
Marketable
Market Capitalization
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Financial Instruments
Marketable
Markets can be categorized by the time to maturity:
Bonds
Debentures
Common Stock
Preferred Stock
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Financial Markets
Primary Market
Markets that involve the issue of new securities by the
borrower in return for cash from investors (Capital
formation occurs)
Secondary Market
Markets that involve buyers and sellers of existing
securities. Funds flow from buyer to seller. Seller
becomes the new owner of the security. (No capital
formation occurs)
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Financial Markets
Types of Secondary Markets
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Financial Markets
Other Markets
Third Market
Trading of securities that are listed on organized exchanges
in the Over-the-counter market
Fourth Market
Trading of securities directly between investors (usually
between two large institutions) without the involvement of
brokers or dealers.
Operates through the use of privately owned automated
systems such as Instinet
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Total Assets
Canadian direct investments abroad
Canadian portfolio investments
Portfolio foreign bonds
82,374
Portfolio foreign stocks
189,175
Other portfolio investments
13,055
Other Canadian investments
Loans
48,325
Allowances
Deposits
120,694
Official international reserves
38,030
Other assets
59,319
Total Liabilities
Foreign direct investments in Canada
Foreign portfolio investments
Portfolio Canadian bonds
380,017
Portfolio Canadian stocks
107,598
Portfolio Canadian money market instruments 20,783
Other foreign investments
Loans
36,107
Deposits
201,639
Other liabilities
22,829
Canada's Net International Investment Position
($ million)
1,016,031
465,058
284,604
266,369
1,184,534
415,561
508,398
260,575
-168,503
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Summary
In this chapter you have learned about:
Financial systems in general, and the Canadian
financial system in particular
Major participants in the Canadian financial system,
including the different types of financial securities and
financial markets
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Internet Links
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Copyright
Copyright 2007 John Wiley & Sons Canada, Ltd. All rights reserved.
Reproduction or translation of this work beyond that permitted by Access
Copyright (the Canadian copyright licensing agency) is unlawful.
Requests for further information should be addressed to the Permissions
Department, John Wiley & Sons Canada, Ltd. The purchaser may make
back-up copies for his or her own use only and not for distribution or
resale. The author and the publisher assume no responsibility for errors,
omissions, or damages caused by the use of these files or programs or
from the use of the information contained herein.
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