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Questions and Answers
What defines financial assets?
What defines financial assets?
What is the primary role of financial intermediaries?
What is the primary role of financial intermediaries?
What is a distinguishing feature of exchanges or auction markets?
What is a distinguishing feature of exchanges or auction markets?
Which of the following describes marketable financial assets?
Which of the following describes marketable financial assets?
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What is intermediation in finance?
What is intermediation in finance?
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Which of the following describes Over-the-Counter (OTC) trading?
Which of the following describes Over-the-Counter (OTC) trading?
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Which statement about credit crunch is correct?
Which statement about credit crunch is correct?
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What role do brokers play in financial markets?
What role do brokers play in financial markets?
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What is meant by market capitalization?
What is meant by market capitalization?
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What distinguishes the stock market from the bond market?
What distinguishes the stock market from the bond market?
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What are crown corporations?
What are crown corporations?
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What do venture capitalists primarily provide to new businesses?
What do venture capitalists primarily provide to new businesses?
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Which of the following correctly identifies non-marketable financial assets?
Which of the following correctly identifies non-marketable financial assets?
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What is staged funding in venture capital?
What is staged funding in venture capital?
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Why might traditional sources of funding be difficult for emerging businesses to access?
Why might traditional sources of funding be difficult for emerging businesses to access?
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What is the significance of personal investment in the context of venture capital funding?
What is the significance of personal investment in the context of venture capital funding?
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Study Notes
Finance: Introduction
- Finance is the study of how savings (money) are allocated between lenders and borrowers.
- Lenders and borrowers can be individuals or institutions.
- Savings are allocated to those who need it for various reasons.
Real Assets
- Real assets are tangible items, personal or business, like houses, land, appliances, cars, office buildings, factories, mines, machinery/equipment.
- These assets represent the value of personal and business property.
- Stock and inventory are also considered business assets.
Financial Assets
- Financial assets represent a claim one individual or institution holds on another.
- This includes various financial instruments.
What is Money?
- Money is generally accepted as a measure of value, a medium of exchange, and a means to settle obligations.
- Money is a scarce resource.
The Financial System
- The financial system includes tangible items owned by individuals/businesses, residential structures, consumer durables, office towers, factories, machinery, and equipment.
- The system consists of financial assets in the form of claims that one individual has on another.
- Loans, mortgages, and consumer credit are examples of claims.
Intermediation
- The financial system transfers money from lenders with surpluses to borrowers in need.
- Intermediation brings lenders and borrowers together. This can be done directly (e.g., borrowing from friends or family) or indirectly (using financial institutions like banks).
- Sometimes, intermediaries (brokers) facilitate transactions without changing the nature of the transaction.
- In other cases, financial intermediaries raise capital on behalf of others, creating a different nature of transaction (e.g., claims on the intermediary entity as opposed to the borrower directly).
Market Intermediaries
- Market intermediaries (brokers) assist in transactions without altering the transaction type.
- Financial intermediaries change the nature of transactions, raising money by directly borrowing from others in order to make loans to others.
- Individuals/businesses rely on willingness of lenders; if not, intermediaries can't lend.
- Banks and insurance companies are examples of intermediaries.
Financial Instruments and Markets
- Financial instruments (e.g., stocks and bonds) establish the rights and obligations of parties involved.
Stock vs. Bond Markets
- Stock markets facilitate transactions of equities (ownership in a company).
- Bond markets involve transactions in debt securities (representing a claim on the borrower).
Primary and Secondary Markets
- Primary markets facilitate the issuance of new securities.
- Secondary markets enable the trading of existing securities.
- Secondary market types include stock exchanges (exchanges/auction), dealer/over-the-counter markets.
Crown Corporations
- Crown corporations are government-owned companies providing goods/services (e.g., Hydro-Quebec, Ontario Power Generation).
Financial Assets:
- Broadly, assets representing a claim against another entity or party.
Brokers
- Intermediaries facilitating the sale of financial instruments.
- They facilitate market activity.
Market Capitalization
- A measure of a company's market value.
Financial Instruments and Markets
- Include instruments representing ownership (equity), and instruments representing debt obligations.
Chapter 10: How Firms Raise Capital
- Entrepreneurs seek capital to make their ideas operational.
Venture Capital
- Venture capitalists provide early-stage funding for new businesses.
- Venture capitalists often invest in startups and young companies.
Staged Funding
- Stages of funding provide opportunities to evaluate the management team and the company's financial performance.
- Venture capitalist firms use stages to allocate investments.
Personal Investment
- Requires personal investment by the entrepreneurs, to support the business.
Syndication
- Investing in various firms through multiple venture capital firms, to divide risk.
IPO (Initial Public Offering)
- Companies selling shares to the public through an IPO.
- Allows businesses to raise significant capital.
IPO Process
- Investment bankers facilitate the process for a company to go public.
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Description
Explore the foundational concepts of finance, including the roles of lenders and borrowers. Understand the differences between real and financial assets, and learn the vital functions of money within the financial system.
