AFM 121 CH. 1-3 EXAM QUESTIONS AND ANSWERS
VERIFIED LATEST UPDATE
Vital function of financial markets
-Help facilitate transfer of capital
-Those who have extra wealth (i.e. Have saved money)
-Those who require capital (i.e. Want to invest money)
3 components of wealth transfer process
1. Financial instruments (what is actually bought / sold)
2. Financial markets (facilitate buying / selling of #1)
3. Financial intermediaries (people / companies involved in #1 and #2)
Capital
Savings of:
-Individuals (you and me)
-Corporations
-Governments
Direct investment
Assets that generate wealth (land, real estate, equipment)
Indirect investment
Financial assets:
-Stocks (ownership of a company)
-Bonds (debt of a company or government)
,-Treasury bills (debt of a government)
-Companies and governments issue these financial assets and receive funds
-They then take these funds and invest the funds directly
-Investors buy these financial assets to generate a return (i.e. Make more money than
originally invested)
Efficient allocation of capital
Capital is mobile, scarce and sensitive. Those who have capital will only transfer / invest
it if it is easy, cheap and generates a good return
Capital flows depend on
•Political environment - stable government or banana republic?
•Economic trends
•Fiscal policy (government spending and taxation)
•Monetary policy (government by central banks)
•Investment opportunities
•Labour force (highly educated / laws governing rights of labour force)
Sources of capital
•Retail investors - individuals like you and me
•Institutional investors
-Pension funds (Canada Pension Plan Investment Board; Ontario Teachers')
-Mutual funds (Trimark, AGF)
•Foreign investors:
-Can include foreign retail, institutional and government investors
, -Investments are made directly in Canadian firms or through stocks / bonds for
Canadian firms listed on foreign exchanges
Users of capital
•Individuals don't (if needed they will go to a bank for a loan)
•Companies / businesses:
-Earn money internally through existing operations and reinvest that money (think Apple
with its huge pile of cash)
-Raise $ by issuing stocks / bond
•What do they invest these funds in?
-New products / markets / machinery that they hope will grow the company more and
generate additional returns
Government users of capital
•Federal, provincial, municipal issue debt
-Treasury bills (debt due in less than one year)
-Longer term debt-Canada Savings Bonds (federal / provincial only)
•What do they spend these funds on?
-All forms of gov spending that aren't covered by tax and other revenues
-Health care, education, infrastructure spending (roads, sewers, water)
Financial instruments
The mechanisms by which wealth / capital is transferred
VERIFIED LATEST UPDATE
Vital function of financial markets
-Help facilitate transfer of capital
-Those who have extra wealth (i.e. Have saved money)
-Those who require capital (i.e. Want to invest money)
3 components of wealth transfer process
1. Financial instruments (what is actually bought / sold)
2. Financial markets (facilitate buying / selling of #1)
3. Financial intermediaries (people / companies involved in #1 and #2)
Capital
Savings of:
-Individuals (you and me)
-Corporations
-Governments
Direct investment
Assets that generate wealth (land, real estate, equipment)
Indirect investment
Financial assets:
-Stocks (ownership of a company)
-Bonds (debt of a company or government)
,-Treasury bills (debt of a government)
-Companies and governments issue these financial assets and receive funds
-They then take these funds and invest the funds directly
-Investors buy these financial assets to generate a return (i.e. Make more money than
originally invested)
Efficient allocation of capital
Capital is mobile, scarce and sensitive. Those who have capital will only transfer / invest
it if it is easy, cheap and generates a good return
Capital flows depend on
•Political environment - stable government or banana republic?
•Economic trends
•Fiscal policy (government spending and taxation)
•Monetary policy (government by central banks)
•Investment opportunities
•Labour force (highly educated / laws governing rights of labour force)
Sources of capital
•Retail investors - individuals like you and me
•Institutional investors
-Pension funds (Canada Pension Plan Investment Board; Ontario Teachers')
-Mutual funds (Trimark, AGF)
•Foreign investors:
-Can include foreign retail, institutional and government investors
, -Investments are made directly in Canadian firms or through stocks / bonds for
Canadian firms listed on foreign exchanges
Users of capital
•Individuals don't (if needed they will go to a bank for a loan)
•Companies / businesses:
-Earn money internally through existing operations and reinvest that money (think Apple
with its huge pile of cash)
-Raise $ by issuing stocks / bond
•What do they invest these funds in?
-New products / markets / machinery that they hope will grow the company more and
generate additional returns
Government users of capital
•Federal, provincial, municipal issue debt
-Treasury bills (debt due in less than one year)
-Longer term debt-Canada Savings Bonds (federal / provincial only)
•What do they spend these funds on?
-All forms of gov spending that aren't covered by tax and other revenues
-Health care, education, infrastructure spending (roads, sewers, water)
Financial instruments
The mechanisms by which wealth / capital is transferred
