1. Chapter 18 1 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Chapter Understanding Money, Financial Institutions, and the Securities Markets Understanding Money, Financial Institutions, and the Securities Markets Prepared by Norm Althouse University of Calgary Prepared by Norm Althouse University of Calgary 18

2. Chapter 18 2 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Characteristics of Money 1 Divisibility Portability Durability Scarcity

3. Chapter 18 3 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Functions of Money 1 Medium of Exchange Standard of Value Store of Value Functions of Money

4. Chapter 18 4 Copyright © 2008 by Nelson, a division of Thomson Canada Limited The Canadian Money Supply 1 Time Deposits Pay interest Cannot be withdrawn on demand Demand Deposits Money in chequing accounts Can be withdrawn on demand Money in chequing accounts Can be withdrawn on demand Currency Coins and Paper Money

5. Chapter 18 5 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 2 The Bank of Canada Activities funds-management services supplies quality bank notes conducts monetary policy promotes safety and efficiency of Canada’s financial system

6. Chapter 18 6 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 2 Carrying Out Monetary Policy Tools used by the Bank of Canada Tools used by the Bank of Canada Target for the overnight rate Open Market Operations

7. Chapter 18 7 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 2 Carrying Out Monetary Policy Open Market Operations Purchase and sale of Canadian government securities Purchase and sale of Canadian government securities Signal to the major participants in the money market as to borrowing rates Signal to the major participants in the money market as to borrowing rates Target for the Overnight Rate Target for the Overnight Rate

8. Chapter 18 8 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 3 Financial Institutions Nondepository Institutions Depository Institutions Insurance Companies Pension Funds Brokerage Firms Finance Companies Chartered Banks Trust Companies Credit Unions or Caisses Populaires Credit Unions or Caisses Populaires

9. Chapter 18 9 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 4 Insuring Deposits Insures eligible deposits to the value of $100,000 Accountable to Canada’s Parliament > Minister of Finance Federal Crown Corporation Canada Deposit Insurance Corporation (CDIC)

10. Chapter 18 10 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 5 Offer Trade- Related Services Provide Loans  Provide global cash management services  Help firms manage cash flows  Improve their payment efficiency  Reduce exposure to operational risks International Banking The Role of Canadian Banks

11. Chapter 18 11 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Stocks and Bonds 6 BondsBonds SharesShares Securities Investment certificates that represent either equity or debt Ownership that allows voting rights Can be bought and sold (liquidity) May pay dividends Ownership that allows voting rights Can be bought and sold (liquidity) May pay dividends Dividends set at issuance, and are paid before common stock dividends Ownership does not allow voting rights Dividends set at issuance, and are paid before common stock dividends Ownership does not allow voting rights

12. Chapter 18 12 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Bonds 7 BondsBonds Long-term debt obligations Principal – par value Interest – coupon rate

13. Chapter 18 13 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Types of Bonds 7 Government High-yield (junk) bonds Convertible bonds Corporate Mortgage bonds Debentures

14. Chapter 18 14 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 8 Other Types of Securities Mutual Fund Futures Contracts Financial-services company that pools investors’ funds to buy a selection of securities Legally binding obligations to buy or sell commodities or financial instruments at later date Options Contracts to buy or sell quantities of common stocks or financial instruments at later date

15. Chapter 18 15 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 8 Appeal of Mutual Funds  Good way to hold a diversified, less risky, portfolio  Professional management  May offer higher returns

16. Chapter 18 Improvement in Internet technology Improvement in Internet technology 16 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 9 Securities Market Help companies raise long-term financing, a process called underwriting Investment Bankers Investment Bankers A person licensed to buy and sell securities on behalf of clients Stockbroker Online Investing

17. Chapter 18 17 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 9 Types of Markets Secondary Market Secondary Market Old (already issued) securities are bought and sold, or traded, among investors Primary Market New securities are sold to the public

18. Chapter 18 18 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 10 Types of Securities Markets Over-the-Counter Market Organized Stock Exchanges Buying and Selling at Securities Exchanges

19. Chapter 18 19 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 10 A telecommunications network that links dealers and enables them to trade securities. A telecommunications network that links dealers and enables them to trade securities. Over-the-Counter (OTC) Market The first electronic-based stock market and the fastest growing part of the stock market. NASDAQ The Over-the-Counter Market

20. Chapter 18 20 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 10 Bull Market Bear Market Prices rise. Better returns. Prices rise. Better returns. Prices go down. Low, or negative, returns. Prices go down. Low, or negative, returns. Bull or Bear Market?

21. Chapter 18 TSX Index 2004 - 2008 21 Copyright © 2008 by Nelson, a division of Thomson Canada Limited Bull market Bear market

22. Chapter 18 22 Copyright © 2008 by Nelson, a division of Thomson Canada Limited 11 Integration of Banking, Brokerage, and Insurance Delivery of Services with “Clicks and Bricks” Growth of Mega-Financial Institutions Trends in Financial Institutions