FM_ch5_notes - Chapter 5: Financial Markets, Institutions...

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Chapter 5: Financial Markets, Institutions and Securities Summary Overview of Financial Markets There are two distinct financial markets: o The Money Market, and o The Capital Market. Financial Securities are created in Primary Markets. Secondary Markets exist for owners to sell their securities or purchase existing ones. Flow of Funds in the Financial Markets In Canada, individuals are large net suppliers of funds, while businesses and government are the largest net demanders of funds. The flow of funds in financial markets have three channels for savers’ cash to flow: o From savers through financial intermediaries directly to users o From savers through financial intermediaries, who provide funds to users via the money or capital markets o From savers through financial intermediaries who buy and sell securities on behalf of the savers in the money or capital markets Financial Markets in Operation Financial markets allow for the transfer of cash for financial securities. The importance of financial markets and financial intermediaries cannot be overstated; they are key factors enabling an economy to operate and grow. 1
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Chapter 5: Financial Markets, Institutions and Securities Financial Intermediaries There are six principal financial intermediaries in Canada: o Deposit-taking, loan-making institutions; o Investment dealers; o Mutual funds; o Pension funds; o Life insurance companies; and o The Bank of Canada. Table 5.1 Total Assets of Major Financial Intermediaries in Canada Trust and Financial Markets In order for financial markets to function efficiently, the participants in the market must have trust in the financial institutions (as well as legal framework that supervises and governs their operation), so that when they place their savings, or borrow the savings of others, there will be confidence that expected values will be treated fairly. The Money Market The Money Market involves trading of debt securities with maturities of less than one year. The Canadian Money Market was established with the Bank of Canada in March 1935. Interest rates set by the Bank of Canada in the money market include: o Bank Rate charged on one-day loans to financial institutions; and o The Overnight Rate that financial institutions use when lending to each other overnight or for one day. Money Market Instruments 2 Financial Intermediary 1991 (in millions) 1996 2001 2006 Deposit-taking $ 891 119 $1 333 333 $1 941 021 $2 738 755 Life Insurance $ 156 046 $ 208 098 $ 282 414 $ 415 928 Mutual Funds $ 53 700 $ 216 745 $ 438 179 $ 660 247 Pension Funds $ 225 762 $ 419 665 $ 576 933 $ 833 317 Investment Dealers $ 2 898 $ 7 158 $ 12 454 $ 21 132 Bank of Canada $ 27 045 $ 30 584 $ 41 804 $ 51 635 Total Assets $1 356 570 $2 215 583 $3 292 805 $4 721 014
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Chapter 5: Financial Markets, Institutions and Securities The main securities are: o Treasury Bills; o Short-term Government Bonds; o Commercial Paper; o Finance Company Paper;
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This note was uploaded on 11/15/2009 for the course BBA ADMN3116 taught by Professor G.jensen during the Fall '09 term at Laurentian.

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FM_ch5_notes - Chapter 5: Financial Markets, Institutions...

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