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					   MONEY & THE
FINANCIAL SYSTEM




29/3/2006          1
   The Three Functions
        of Money
Medium of     Accepted as payment for
Exchange       products and resources
Unit of         Single standard for assigning
measurement   and comparing values of
                      products and resources
Store of        Means of retaining and
value          accumulating wealth




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        The Six Characteristics
               of Money
    •   Acceptability
    •   Divisibility
14-2
    •   Portability
    •   Stability
    •   Durability
    •   Difficulty to
        counterfeit


          29/3/2006               3
              Penny Pinchers

                                           A penny saved is…
14-3
                   18-29      46%
                             40%                Those who always
                   30-44
                                                     take pennies
                   45-64           56%                  in change
                   65-over               71%

             While 67% of adults say the government should continue making
             pennies, 51% sometimes leave theirs at the store.

       29/3/2006                                                                 4
                                               Source: http://www.usatoday.com/snapshot/
                                               news/nsnap062.htm
                 Near Money
• Savings account
• Money market account
• Guaranteed investment
  certificates
• Credit card
• Debit card
• Traveler’s cheque
• Money order
• Cashier’s cheque




     29/3/2006                5
Credit Card Bill Paying
                                       With Income of
                        All               $50,000-
                     Households           $100,000
Pay all each month      44%                       40%
Never pay off           36%                       45%
Pay some monthly        21%                       15%

 29/3/2006                                                     6
                            Source: “A New Financial Health Barometer,”
                            Business Week, November 30, 1998, p. 8.
       Credit Cards Marketed
          on the Internet

14-6    • More than 15 million people searched the
          Internet for a new credit card within the
          last three years.
        • Nearly 6 million people completed online
          card applications within the last two years.
         • NextCard markets its credit card solely on
            the Web and receives between 80,000 and
            100,000 applications per month “Click Here and Charge,”
        29/3/2006                 Source: Tom Maguire,      7
                                       American Demographics, January 1999.
  THE CANADIAN
FINANCIAL SYSTEM




29/3/2006          8
            The Bank of Canada


  • Founded in 1934 to regulate “ credit
  policy and currency in the best interests
  of the economic life of the nation.
  •Became a crown corporation in 1938
  with all shares now held by the
  Minister of Finance.
29/3/2006                                     9
       The Responsibilities of the
          the Bank of Canada
• To control the money supply using
  monetary policy
• To provide central banking services
• To be the sole issuer of currency
• To administer the public debt
• To oversee the administration of the
  clearing and settlement systems
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             The Tools of Monetary
                     Policy
1. Open market operations
2. Influence on the overnight rate
3. Cash management activities




 29/3/2006                           11
        Central Banking Services
1.    One-day sale and repurchase transactions
2.    Acting as the federal government’s banker
3.    Intervention in the foreign exchange market as
      agent of the Minister of Finance
4.    Management of the governments foreign
      exchange reserves
5.    Maintenance of deposit and safekeeping
      accounts for Canadian financial institutions and
      other central banks
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            The Issuance of Currency
     The Bank of Canada is:
     • The sole issuer of Canadian bank notes
14-10b

     • Is responsible for ensuring the authenticity of all
       bank notes
     • Operates to ensure a sufficient supply of
       currency in the economy




       29/3/2006                                             13
            Administration of the Public
                       Debt
14-10c
         The Bank of Canada:
         • Advises the federal government on borrowing
         • Manages new debt offerings
         • Services outstanding debt
         • Administers some 7 million Canada Savings Bond
           holder accounts




         29/3/2006                                    14
               The Canadian Payment
                    Association
           The CPA operates two major systems:
14-11a


           •The Automated Clearing Settlement System
           (ACSS)

           •The Large Value Transfer System (LVTS)




         29/3/2006                                     15
               How the System Works
         Step 1: Payment by one of the many means available –
14-11b           cheque, debit card, direct deposit, and so on.
         Step 2: Clearing, the daily process by which CPA members
                 exchange deposited payment items, and then
                 determine net amounts owed each other
         Step 3: Settlement, the procedure by which CPA members
                 use the funds on deposit at the Bank of Canada to
                 fulfill their net obligations to all other members.




   29/3/2006                                                                16
                                             Source: www.cdnpay.ca/eng/pud/Intro
                                                        .to.CPA.ENG.htm
     Banking and Nonbanking
           Institutions
                •   Chartered banks
Banking
Institutions:   •   Trust companies
                •   Credit unions
                •   Caisses populaires




29/3/2006                                17
           Banking and Nonbanking
        Nonbanking Institutions
        Institutions:   • Insurance
14-13
                          companies
                        • Pension funds
                        • Mutual funds
                        • Money market
                          funds
                        • Brokerage firms
                        • Nonfinancial firms
        29/3/2006
                        • Finance companies    18
        Per Capita Spending
           on Insurance

14-14
            $4,395

                       $3,097
                                                    $2,197




         Japan       Switzerland                   U.S.A.
        29/3/2006                                                           19
                            Source: Swiss Reinsurance Co., http://www.usatoday.com/
                            snapshot/money/msnap004.htm.
                ABM Use in Canada
         • There are bout 21,000 ABMs across
14-15    Canada
         •Canadians are relatively heavier users of
         ABMs than Americans
         •Canadian carried out over 1.25 billion ABM
         transactions in 2000


  29/3/2006                                     20
                     PC Banking
14-16   • Estimates indicate that the number of
          North American households doing PC banking
          jumped from 4.8 million to more than 10
          million by the end of 2001.
         • Two “musts” for successful online banking:
                1. The service must be accessible via the
                          Internet (as opposed to direct
            dial-up)
                2. No online security issues
        29/3/2006                                       21
                             Source: http://www.demographics.com/publications/ad/99_ad/
                             9902_ad/ad990205d.htm, March 15, 1999.
   SOLVE THE DILEMMA:
  SEEING THE FINANCIAL
 SIDE OF BUSINESS, p. 371
• List the various types of Canadian financial
  institutions & the primary functions of
  each.
• What services of each financial institution
  is Hill’s new company likely to need?
• Which single financial institution is likely
  to be best able to meet Hill’s small
  company needs now? Why?



    29/3/2006                                    22
    CHALLENGES TO THE
    CANADIAN BANKING
         SYSTEM
• Increasing competition from large
  specialized financial serves
  companies in an increasingly global
  market
  – One response: mergers (but not allowed)
• Bill C-8 (14/6/2001)



   29/3/2006                                  23
  VIDEOCASE: WHY
STOCKS? WHY BONDS?




   Bear Market by William Holbrook Beard (1824-1900)

 29/3/2006                                             24
           QUESTIONS
• If you were to become a lender of
  money to a company, what kind of
  security would you buy?
• If you were to become an equity owner
  of a company, what kind of security
  would you buy?
• Explain the different tax treatment for
  interest payments and dividend
  payments.


   29/3/2006                                25
     ASSIGNMENT FOR
        3/4/2006
• TOPIC: Financial
  Management & Securities
  Markets
• Activities:
   – Solve the Dilemma:
     Supervising Rapid Growth,
     p. 388
   – Build Your Skills:
     Choosing among Projects,
     p. 402
   – Video case: Role of the
     Financial Managers, p. 404




     29/3/2006                    26

				
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