Prepared byErez Harosh

INTRODUCTION TO CORPORATE FINANCEXcash Financial Service

CHAPTER 1 An Introduction to Finance

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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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Assets and Liabilities of Households, 2005

Assets $ Billion Liabilities $ BillionHouses 1,086 Consumer credit 260Consumer Durables 435 Loans 131Land 827 Mortgages 588Real Assets 2,348 Total Liabilities 979Deposits 683Debt 114Pensions and insurance 1,200Shares 1,254Foreign and other 72Financial Assets 3323Total Assets 5,671

Source: Statistics Canada. National Balance Sheet Accounts, Quarterly Estimates, Fourth Quarter 2005. Ottawa: M inister of Industry, 2006 (Catalogue No. 13-214-XIE).

Table 1-2 Assets and Liabilities of Households, 2005

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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 SystemChannels 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 SystemFinancial Intermediaries

• Banks and other deposit-taking institutions• Insurance companies• Pension Funds• Mutual Funds

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Internet Links

• BMO InvestorLine: www.bmoinvestorline.com• Investment Funds Institute of Canada: www.ific.ca• Globe and Mail Report on Business:

www.theglobeandmail.com• Toronto Stock Exchange (TSX): http://www.tsx.com/• Canadian Trading and Quotation System Inc.:

http://www.cnq.ca/ • Ontario Securities Commission:

http://www.osc.gov.on.ca/index.jsp• Winnipeg Commodity Exchange: http://www.wce.ca/• New York Stock Exchange (NYSE) Euronext:

http://www.nyse.com/

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Copyright

Copyright © 2016 Xcash Financial Service Inc. 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, Xcash Financial Service Inc. 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.