Chapter 15
Understanding Money, Financial Institutions,
and the Securities Markets
Prepared by
Norm Althouse
University of Calgary
Copyright © 2011 by Nelson Education Ltd.
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Learning Outcomes
1 Understand the characteristics of money and its functions.
2 Describe the basic functions of the Bank of Canada, and how it manages the
Canadian money supply.
3 Identify the key financial institutions, and the role they play in the process of
financial intermediation.
4 Outline how the Canada Deposit Insurance Corporation protects depositors’
funds.
5 Summarize the role of Canadian banks in the international marketplace.
6 Distinguish between common shares and preferred shares.
7 Understand the investment advantages and disadvantages of bonds.
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8 List other types of securities available to investors.
9 Describe the function of the securities markets.
10 List some of the trends that are reshaping the financial industry.
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Money, Financial Institutions, and the Securities Markets
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Advanced technology, globalization of markets, and the
relations of regulatory restrictions are accelerating the
pace of change in the financial services industry.
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Characteristics of Money
Scarcity
Durability
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Portability
Divisibility
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Functions of Money
Medium of Exchange
Functions
of Money
Standard of Value
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Store of Value
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The Canadian Money Supply
Currency
Coins and Paper Money
Demand Deposits
Money in chequing accounts
can be withdrawn on demand
Time Deposits
Pay interest
cannot be withdrawn on demand
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The Bank of Canada Activities
conducts monetary policy
Economic
supplies
qualityGrowth
bank notes
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funds-management
services
Full Employment
promotes safety and efficiency of
Price
Stability
Canada’s
financial
system
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Monetary Tools and Their Effects
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Financial Intermediation
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Financial Institutions
Depository
Institutions
Non-depository
Institutions
Chartered Banks
Insurance Companies
Trust Companies
Pension Funds
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Brokerage Firms
Credit Unions or
Caisses Populaires
Finance Companies
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Insuring Deposits
Canada Deposit Insurance Corporation (CDIC)
Federal Crown Corporation
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Accountable to Canada’s Parliament > Minister of Finance
Insures eligible deposits to the value of $100,000
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International Banking The Role of Canadian Banks
Provide Loans



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
Offer TradeRelated Services
Provide global cash management services
Help firms manage cash flows
Improve their payment efficiency
Reduce exposure to operational risks
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Stocks and Bonds
Investment certificates that
represent either equity or debt
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Securities
Shares
• Ownership that allows voting rights
• Can be bought and sold (liquidity)
• May pay dividends
Bonds
• Dividends set at issuance,
and are paid before common stock
dividends
• Ownership does not allow
voting rights
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Shares
Common
Shares
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Preferred
Shares
• 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
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Bonds
Long-term debt obligations
Bonds
Principal – par value
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Interest – coupon rate
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Types of Bonds
Government
Corporate
High-yield (junk) bonds
Mortgage bonds
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Debentures
Convertible bonds
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Other Types of Securities
Mutual Fund
Financial-services company
that pools investors’ funds
to buy a selection of securities
Futures Contracts
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
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Appeal of Mutual Funds
 Good way to hold a diversified, less risky, portfolio
 Professional management
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 May offer higher returns
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Securities Market
Investment Bankers
Help companies raise
long-term financing, a process
called underwriting
Stockbroker
A person licensed to buy and
sell securities on behalf of clients
Online Investing
Improvement in Internet
technology
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Types of Markets
Primary
Market
New securities are sold to the public
Secondary
Market
Old (already issued) securities are bought
and sold, or traded, among investors
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Buying and Selling at Securities Exchanges
Organized Stock Exchanges
Types of
Securities
Markets
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Over-the-Counter Market
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The Over-the-Counter Market
Over-the-Counter
(OTC)
Market
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NASDAQ
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A telecommunications network
that links dealers and enables
them to trade securities.
The first electronic-based stock
market and the fastest growing
part of the stock market.
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Bull or Bear Market?
Bull
Market
Prices rise.
Better returns.
Bear
Market
Prices go down.
Low, or negative, returns.
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TSX Index 2004 - 2008
Bull market
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Bear
market
Copyright © 2008 by Nelson, a division of
Thomson Canada Limited
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Trends in Financial Institutions
Growth of Mega-Financial Institutions
Integration of Banking, Brokerage, and Insurance
Delivery of Services with “Clicks and Bricks”
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Changing the Way We Bank
regulations
services offered
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