ECON 1000 Chapter Notes - Chapter 8: Credit Union, Department Of Finance Canada, Mutual Fund

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ECON 1000
MACRO
Chapter 8
Saving, Investment, and the Financial System
The Financial System consists of those institutions in the economy tha held to match one
person’s savings with another person’s investment.
Financial Institutions in the Canadian Economy
At the broadest level, the financial system moves the economy’s scarce resources from savers
(people who spend less than they earn) to borrows (people who spend more than they earn).
Savers supply their money to the financial system with the expectation that they will get it back
with interest at a later date. Borrowers demand money from the financial system with the
knowledge that they will be required to pay it back with interest at a later date.
Regulators set the rules that guide the operation of a financial system that otherwise operates
almost wholly within the private sector. The Office of the Superintendent of Financial
Institutions (OSFI) is an independent agency of the federal government that repors to the
Department of Finance Canada. The OSFI is the primary regulatory of federally regulated banks,
insurance companies, and pension plans in Canada. Credit unions and caisses populaires,
securities dealers, and mutual funds are largely regualated by provincial governments.
Finally, Canada’s central bank, the Bank of Canada, also plays an important role in regulating
the Canadian financial system.
Financial Markets
Financial markets are the institutions through which a person who wants to save can directly
supply funds to a person who wants to borrow. The 2 most important financial markets in our
economy are the bond market and the stock market
The Bond Market
A bond is a certificate of indebtedness that specifies the obligations of the borrower to the
holder of the bond. A bond is an IOU. It identifies the time at which the loan will be repaid,
called the date of maturity, and the rate of interest that will be paid periodically until the loan
matures. The buyer can hold the bond until maturity or can sell the bond at an earlier date to
someone else.
A bond’s term—the length of time until the bond matures. Some bonds have short terms, such
as a few months, while others have terms as long as 30 years. Long-term bonds are riskier than
short-term bonds because holders of long-term bonds have to wait longer for repayment of
principal. If a holder of a long-term bond needs his money earlier than the distant date of
maturity, he has no choice but to sell the bond to someone else, perhaps at a reduced price. To
compensate for this risk, long term bonds usually pay higher interest rates than short-term
bonds.
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