INTRODUCTION TO

BUSINESS FINANCE

NHU- University for Business

Administration department

Prepared by
Prof. M.Faseeh ullah Khan
© Copy Right TM 2017
 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

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 Learning Objectives

1. What finance is and what is involved in the study of finance.

2. How financial securities can be used to provide financing for
borrowers and simultaneously to provide investment opportunities
for lenders.
3. How financial systems work in general.
4. The channels of intermediation and the role played by market and
financial intermediaries within this system.
5. The basic types of financial instruments that are available and how
they are traded.
6. The importance of the global financial system.

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 Key Terms
• Bourse de Montréal
• 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

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 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
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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
• Financial contracts or securities occur whenever
funds are transferred from issuer to buyer.

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 The Study of Finance

• The study of finance requires a basic understanding

of:
– Securities
– Corporate law
– Financial institutions and markets

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 Real Versus Financial Assets

• Real assets are tangible things owned by persons and

businesses
– Residential structures and property
– Major appliances and automobiles
– Office towers, factories, mines
– Machinery and equipment
• Financial assets are what one individual has lent to
another
– Consumer credit
– Loans
– Mortgages
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 The Financial System
Overview

• The household is the primary provider of funds to businesses

and government.
• Households must accumulate financial resources throughout their
working life times to have enough savings (pension) to live on in
their retirement years
• Financial intermediaries transform the nature of the securities
they issue and invest in
• Banks, trust companies, credit unions, insurance firms, mutual funds
• Market intermediaries simply help make markets work
• Investment dealers
• Brokers

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The Financial System
FIGURE 1-2

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 The Financial System
Channels of Intermediation

• Funds can be channeled from saver to borrower in

three ways:
– Direct intermediation (direct transfer from saver to
borrower – a non-market transaction)
– Direct intermediation (a market-based transaction
usually through a market intermediary such as a
broker)
– Indirect claims through a financial intermediary (where
the financial intermediary such as a bank offers
deposit-taking services and ultimately lends those
deposits out as mortgages or loans)

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Channels of Intermediation

FIGURE 1-3

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 The Financial System
Financial Intermediaries

• Banks and other deposit-taking institutions

• Insurance companies
• Pension Funds
• Mutual Funds

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 The Financial System
The Major Borrowers

• Public Debt
– Governments
• Federal
• Provincial
• Municipal
• Crown Corporations
• Private Debt
– Households
– Non-financial Corporations

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 Financial Instruments

• There are two major categories of financial

securities:
1. Debt 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

• Characteristics of non-marketable securities

– Cannot be traded between or among investors
– May be redeemable (a reverse transaction
between the borrower and the lender)
– Examples:
• Savings accounts
• Term Deposits
• Guaranteed Investment Certificates
• Canada Savings Bonds

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 Financial Instruments
Marketable

• Characteristics of Marketable securities

– Can be traded between or among investors after their original
issue in public markets and before they mature or expire

• Market Capitalization
– Is an important term in finance
– It is the total market value of a company
– It is found by multiplying the number of shares outstanding by
the market price per share.

Market Capitalization  Number of shares  Price per share

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 Financial Instruments
Marketable

Markets can be categorized by the time to maturity:

• Money Market Securities (for short-term debt securities that are
pure discount notes)
– Bankers’ acceptances
– Commercial Paper
– Treasury Bills
• Capital Market Securities (for long-term debt or equity
securities with maturities greater than 1 year)
– 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

• Exchanges or Auction Markets

• Secondary markets that involve a bidding process that takes
place in specific location
• For example TSX, NYSE
• Dealer or Over-the-counter (OTC) Markets
• Secondary markets that do not have a physical location and
consist of a network of dealers who trade directly with one
another.
• For example the bond market

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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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 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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