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1. Prepared by
Erez Harosh
INTRODUCTION TO
CORPORATE FINANCE
Xcash Financial Service

2. CHAPTER 1
An Introduction to Finance

3. CHAPTER 1 - An Introduction to Finance 1 - 3
Lecture Agenda
• Learning Objectives
• Important Terms
• Finance Defined
• Real versus Financial Assets
• The Financial System
• Financial Instruments and Markets
• The Global Financial Community
• Summary and Conclusions
– Concept Review Questions

4. CHAPTER 1 - An Introduction to Finance 1 - 4
Learning Objectives
1. What finance is and what is involved in the study of finance.
2. How financial securities can be used to provide financing for
borrowers and simultaneously to provide investment
opportunities for lenders.
3. How financial systems work in general.
4. The channels of intermediation and the role played by
market and financial intermediaries within this system.
5. The basic types of financial instruments that are available
and how they are traded.
6. The importance of the global financial system.

5. CHAPTER 1 - An Introduction to Finance 1 - 5
Key Terms
• Bourse de Montréal
• brokers
• Canadian Trading and Quotation System Inc. (CNQ)
• capital market securities
• common share
• corporate finance
• Crown corporations
• dealer or over-the-counter (OTC) markets
• debt instruments
• equity instruments
• exchanges or auction markets
• finance
• financial assets
• financial intermediaries
• fourth market
• intermediation
• investments

6. CHAPTER 1 - An Introduction to Finance 1 - 6
Key Terms
• market capitalization
• market intermediary
• marketable financial assets
• money market securities
• New York Stock Exchange (NYSE)
• non-marketable financial assets
• Ontario Securities Commission
• preferred shares
• primary markets
• real assets
• secondary markets
• third market
• Toronto Stock Exchange (TSX)
• TSX Group Inc.
• TSX Markets
• TSX Venture Exchange
• Winnipeg Commodity Exchange

7. CHAPTER 1 - An Introduction to Finance 1 - 7
What Is Finance?
• Finance is the study of how and under what
terms savings (money) are allocated between
lenders and borrowers.
– Finance is distinct from economics in that it
addresses not only how resources are allocated but
also under what terms and through what channels
• Financial contracts or securities occur whenever
funds are transferred from issuer to buyer.

8. CHAPTER 1 - An Introduction to Finance 1 - 8
The Study of Finance
• The study of finance requires a basic
understanding of:
– Securities
– Corporate law
– Financial institutions and markets

9. CHAPTER 1 - An Introduction to Finance 1 - 9
Real Versus Financial Assets
• Real assets are tangible things owned by
persons and businesses
– Residential structures and property
– Major appliances and automobiles
– Office towers, factories, mines
– Machinery and equipment
• Financial assets are what one individual has lent
to another
– Consumer credit
– Loans
– Mortgages

10. CHAPTER 1 - An Introduction to Finance 1 - 10
Assets and Liabilities of Households,
2005
Assets $ Billion Liabilities $ Billion
Houses 1,086 Consumer credit 260
Consumer Durables 435 Loans 131
Land 827 Mortgages 588
Real Assets 2,348 Total Liabilities 979
Deposits 683
Debt 114
Pensions and insurance 1,200
Shares 1,254
Foreign and other 72
Financial Assets 3323
Total Assets 5,671
Source: Statistics Canada. National Balance Sheet Accounts, Quarterly Estimates, Fourth
Quarter 2005. Ottawa: M inister of Industry, 2006 (Catalogue No. 13-214-XIE).
Table 1-2 Assets and Liabilities of Households, 2005

11. CHAPTER 1 - An Introduction to Finance 1 - 11
The Financial System
Overview
• The household is the primary provider of funds to
businesses and government.
• Households must accumulate financial resources throughout their
working life times to have enough savings (pension) to live on in
their retirement years
• Financial intermediaries transform the nature of the
securities they issue and invest in
• Banks, trust companies, credit unions, insurance firms, mutual
funds
• Market intermediaries simply help make markets work
• Investment dealers
• Brokers

12. CHAPTER 1 - An Introduction to Finance 1 - 12
The Financial System
FIGURE 1-2

13. CHAPTER 1 - An Introduction to Finance 1 - 13
The Financial System
Channels of Intermediation
• Funds can be channeled from saver to borrower
in three ways:
– Direct intermediation (direct transfer from saver to
borrower – a non-market transaction)
– Direct intermediation (a market-based transaction
usually through a market intermediary such as a
broker)
– Indirect claims through a financial intermediary
(where the financial intermediary such as a bank
offers deposit-taking services and ultimately lends
those deposits out as mortgages or loans)

14. CHAPTER 1 - An Introduction to Finance 1 - 14
Channels of Intermediation
FIGURE 1-3

15. CHAPTER 1 - An Introduction to Finance 1 - 15
The Financial System
Financial Intermediaries
• Banks and other deposit-taking institutions
• Insurance companies
• Pension Funds
• Mutual Funds

16. CHAPTER 1 - An Introduction to Finance 1 - 16
Internet Links
• BMO InvestorLine: www.bmoinvestorline.com
• Investment Funds Institute of Canada: www.ific.ca
• Globe and Mail Report on Business: www.theglobeandmail.com
• Toronto Stock Exchange (TSX): http://www.tsx.com/
• Canadian Trading and Quotation System Inc.: http://www.cnq.ca/
• Ontario Securities Commission: http://www.osc.gov.on.ca/index.jsp
• Winnipeg Commodity Exchange: http://www.wce.ca/
• New York Stock Exchange (NYSE) Euronext: http://www.nyse.com/

17. CHAPTER 1 - An Introduction to Finance 1 - 17
Copyright
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