International business

What is the financial system?

The mechanism that transfers money from savers (surplus) to users (borrowers)

Who are savers?

Individuals or entities with excess funds not spent

Who are users?

Individuals or entities whose spending exceeds income and need to borrow

Who are typically net savers in Canada?

Households

Who are typically net users in Canada?

Businesses and governments

What is net worth?

The difference between what a person owns and owes

What happens to net worth over a lifetime?

Low/negative early → increases with income → declines in retirement

What are the two ways funds are transferred?

Direct transfer and indirect transfer

What is a direct transfer?

Funds raised directly from savers (e.g.

What is an indirect transfer?

Funds flow through financial institutions or markets

What are securities?

Financial instruments representing obligations of issuers to investors

What are the three types of securities?

Money market instruments

What are money market instruments?

Short-term debt securities (≤1 year maturity)

Examples of money market instruments?

Treasury bills

Why are money market instruments low risk?

Short maturity and high liquidity

What are Treasury bills?

Short-term government securities backed by the Canadian government

What is commercial paper?

Short-term corporate debt security

What is a certificate of deposit (CD)?

Time deposit with a financial institution

What is CDIC insurance?

Protects deposits up to $100

What are bonds?

Long-term debt securities issued by corporations or governments

Who are bondholders?

Creditors of the issuing entity

What is face value?

The amount repaid at maturity

What is maturity date?

The date the bond is repaid in full

What determines bond interest?

A percentage of face value

What is a government bond?

Low-risk bond backed by government credit

What is a corporate bond?

Bond issued by a corporation

What is a secured bond?

Bond backed by collateral

What is a debenture?

Unsecured bond backed only by reputation

What are mortgage-backed securities (MBS)?

Bonds backed by pools of mortgages

What caused the 2008 credit crisis?

Risky subprime mortgage-backed securities

What are bond ratings?

Assessments of bond risk by agencies

Examples of rating agencies?

S&P

What is an AAA bond?

Lowest risk bond rating

What are investment-grade bonds?

BBB or higher

What are junk bonds?

BB or lower

Relationship between interest rates and bond prices?

Interest rates ↑ → bond prices ↓ and vice versa

What is a callable bond?

Bond that issuer can redeem before maturity

Why do issuers call bonds?

To refinance at lower interest rates

What are shares?

Units of ownership in a corporation

What are common shares?

Basic ownership shares with voting rights

What rights do shareholders have?

Voting on directors

What is equity financing?

Raising capital by issuing shares

Advantages of equity financing?

No repayment required

Disadvantages of equity financing?

Loss of control and increased scrutiny

What is a dividend?

Payment to shareholders from profits

Are dividends guaranteed?

No

What is capital gain?

Profit from selling shares at a higher price

What is stock appreciation?

Increase in share price over time

What is a stock split?

Division of shares to increase quantity and reduce price per share

What is residual claim?

Shareholders are paid last in liquidation

What affects stock prices?

Company performance

What are preferred shares?

Shares with fixed dividends and priority over common shares

Do preferred shares have voting rights?

Usually no

What are convertible securities?

Bonds or preferred shares convertible into common shares

What is a financial market?

A place where securities are issued and traded

What is the primary market?

Where new securities are issued (e.g.

What is an IPO?

Initial public offering of shares

What is the secondary market?

Where existing securities are traded between investors

Example of secondary market?

Toronto Stock Exchange (TSX)

What is underwriting?

Financial institutions buying and reselling securities

What is an underwriting discount?

Difference between purchase and selling price (≈5–10%)

What is a stock exchange?

Market for buying and selling shares

What is the TSX?

Canada’s largest stock exchange

What is the NYSE?

World’s largest stock exchange

What is NASDAQ?

Electronic stock exchange with tech companies

What is the fourth market?

Direct trading outside exchanges

What are ECNs?

Electronic networks for direct trading

What is a brokerage firm?

Intermediary executing trades for investors

What is a market order?

Order to buy/sell at best available price

What is a limit order?

Order with set maximum/minimum price

What is diversification?

Spreading investments to reduce risk

What is risk tolerance?

Amount of risk an investor is willing to accept

What are financial institutions?

Intermediaries between savers and borrowers

Two types of financial institutions?

Depository and non-depository

What are depository institutions?

Accept deposits (e.g.

What are non-depository institutions?

Invest funds but don’t accept deposits

Examples of non-depository institutions?

Insurance companies

What do commercial banks do?

Accept deposits and provide loans/services

How do banks make profit?

Interest spread and fees

What is electronic funds transfer (EFT)?

Digital movement of money

Examples of electronic banking?

ATMs

What is fintech?

Technology-driven financial services innovation

Examples of fintech?

Robo-advisors

What is CDIC?

Canadian deposit insurance agency

What problem does CDIC solve?

Bank runs and loss of depositor funds

What is a credit union?

Member-owned financial cooperative

Advantages of credit unions?

Lower fees

What are insurance companies?

Firms that transfer risk in exchange for premiums

What is underwriting (insurance)?

Determining risk and premiums

What are pension funds?

Funds providing retirement income

What do pension funds invest in?

Long-term assets like stocks and real estate

What are finance companies?

Provide short-term loans using collateral

What are mutual funds?

Pools of investor money invested in securities

What is an ETF?

Tradable fund tracking an index

What is an index fund?

Passive fund that mirrors a market index

What is the Bank of Canada?

Canada’s central bank

Main functions of Bank of Canada?

Monetary policy

What is monetary policy?

Control of money supply and interest rates

Goal of monetary policy?

Stable growth and low inflation

What happens if money supply grows too fast?

Inflation