BU111 Study Guide - Final Guide: Td Canada Trust, Unsecured Debt, Secured Loan
1
BU111 Final Exam Notes
Economic Factors
4 Pillars of the Canadian Financial Systems
- Financial institution facilitates flow of money
- Pillar = financial institution
Pillar 1: Chartered Banks
- Privately owned, publicity traded, profit seeking, largest and most important institution
- Ex. TD, RBC, Scotia Bank, CIBC, BMO
- Serves individuals, businesses and others
- Services offered
o Pension services
o Trust services
o International services
o Financial advice
o Electronic funds transfers
Schedule 1- Canadian owned banks, no more than 10% voting shares
Schedule 2 – may be domestically or foreign owned, usually 8% voting shares
- Major source of short – term loans for businesses
Secured loan – putting an asset against your loan, ex. Against your house
Unsecured loan – dot put a asset agaist our loa, higher iterest rates
- Expand money supply through deposit expansion
o Money in bank collects interest
o We pay them higher interest rates
Pillar 2: Alternate Banks
- trust companies and credit unions
o smaller than chartered banks, decreasing importance, being bought out
o become more popular
- trust companies
o safeguards funds and estates entrusted to it, may also serve as trustee, transfer agent and
registrar for corporation
- credit unions
o co-operative savings and lending association formed by a group with common interest
Pillar 3: Specialized Lending and Intermediaries
- insurance companies, venture capital firms, pension funds
o one of the biggest financial intermediaries
o insurance companies are being paid into to be insured, if something happens they cover the
cost, larger risk
find more resources at oneclass.com
find more resources at oneclass.com
2
o large potential for growth, making money off your money
Pillar 4: Investment Dealers
- facilitate trade of stock, bonds, and other products in securities markets
- primary markets (go through provincial security commission)
o investment bankers/dealers – i.e. Stockbrokers
▪ advise – tell you when you should enter the market, length of time
▪ underwrite – take on risk/ownership of the stock or bond
▪ distribute – through secondary markets (Toronto stock exchange/other exchanges)
Changes in Banking Industry
- Deregulation – allowing banks to expand beyond chequing and savings, offering more consumers, ex.
TD buying out Canada Trust = TD Canada Trust
- Changes in consumer demands – expecting more from banks
- Competition from foreign banks – aks at erge to opete ith foreig aks
Bank of Canada (1935)
- Caadas etral ak, aages Caadian economy, regulates aspects of chartered bank operations,
manages money supply
- Other banks borrow from this bank (bank rate)
o Estalishes hartered aks prie iterest rates
Money Supply – Manages money supply in Canada
- If bank of Canada wants to increase money supply, they are able to buy government securities
o People who sell these bonds then deposit the proceeds in their banks
o Deposits irease aks reseres ad their illigess to ake loas
- Can also lower bank rate; causes increase in demand of loans from businesses and households because
customers borrow money more when interest rates drop
- If banks wants to decrease money supply, they are able to sell government securities
o People spend money to buy bonds, these withdrawals bring down baks reseres, reduig
willingness to make loans
- Can also raise bank rates; cause decrease in demand for loans from businesses and households
because customers borrow less money when interest rates rise
Investment Instruments
Bonds – Represents Debt
Characteristics
- Fixed rate of return – coupons often paid semi-annually
- Fixed term – principle repaid at maturity
- Priority over stockholder – related to bankruptcy, bondholders paid first
- Coupon rate = interest rate
- Priiple = ods fae alue (,00)
Types
- Secured vs unsecured (debentures)
find more resources at oneclass.com
find more resources at oneclass.com
3
o Applied to bonds as well backed by some sort of asset (word that it will be paid back), or no
assets backing them
- Registered vs. bearer
o Nae of od holder is registered ith issuer, the dot keep a of our information at the
tie/doest hae to sta ith oe perso
o Requires bondholders to clip coupons from certificates and send them to the issuer to receive
interest payments
Features
- Callable bond
o Issuer being able to pay off a bond before the maturity date
- Serial bond
o Parts of the bond maturing at different times, firm able to pay off portions
- Convertible bond
o Option to convert investment to fixed number of shares (this is good because investment has
potential to increase depending on the share value)
Factors Affecting Price
1. What impacts the coupon rate at bond issue?
- Prevailing interest rates
o Presents how much you get back, not the same as coupon rate
- Credit rating of issuer
o Risk rating
- Features
o If there are more features, it will be more attractive
2. What Impacts bond price when traded?
- Coupon rate and prevailing rate of interest
- Changes in credit rating
o Credit rating may change of company, less security, willing to pay less for bond
- Economic/market risk
o Can impact the risk level of the bond
- Inflation
o As price rises, the bond price will be lower
Concept of Yield
- Percentage return on any investment
- Helps us to compare investments
- Face value always $1,000
- For a bond
o Interest = coupon rate x face value
o Capital gain = face value – purchase price
Yield
=
What you made
What you paid
=
Interest + Capital Gain
What you paid
=
x%
find more resources at oneclass.com
find more resources at oneclass.com
19
BU111 Full Course Notes
Verified Note
19 documents
Document Summary
Privately owned, publicity traded, profit seeking, largest and most important institution. Services offered: pension services, trust services. International services: financial advice, electronic funds transfers. Schedule 1- canadian owned banks, no more than 10% voting shares. Schedule 2 may be domestically or foreign owned, usually 8% voting shares. Major source of short term loans for businesses. Secured loan putting an asset against your loan, ex. Unsecured loan do(cid:374)(cid:859)t put a(cid:374) asset agai(cid:374)st (cid:455)our loa(cid:374), higher i(cid:374)terest rates. Expand money supply through deposit expansion: money in bank collects interest, we pay them higher interest rates. Pillar 3: specialized lending and intermediaries insurance companies, venture capital firms, pension funds: one of the biggest financial intermediaries insurance companies are being paid into to be insured, if something happens they cover the cost, larger risk. 1 large potential for growth, making money off your money. Pillar 4: investment dealers facilitate trade of stock, bonds, and other products in securities markets.
