Question

1.What are the principal financial institutions in Canada? What is the principal role of each?

2. What are direct and indirect finance? How do they differ?

3. How are money and capital markets different?

4. What is a dealer market? How do dealer and auction markets differ?

5. What is the largest auction market in Canada

Answer 1

1. Principal Financial Institutions in Canada are following:

· The Bank of Canada: It is the central bank of Canada. Its principal role is to promote the economic and financial welfare of Canada, as defined in the Bank of Canada Act. It formulates monetary policy to keep inflation stable.

· Business Development Bank of Canada- It is an institution made for development of businesses. Its main focus is on small and medium-sized enterprises. They provide financing, advisory services to businesses.

· Atlantic Credit Unions- Credit unions are co-operative financial institutions, owned by the members. Its role is to provide liquidity management services and trade association services for the betterment of credit unions.

· Farm Credit Corporation- This financial institution was created to fulfill the responsibility of providing financial assistance to farmers and agri-business as well as investment grade notes.

· Ombudsman of Banking Services and Investments- It acts as a mediator between banks and the customers. Its board is made up of members from banking fraternity and independent members.

2. A. Direct Financing- Refers to the type of financing where the institution takes loan directly from lender without any kind of a third party. The methods used for direct financing include issuing shares of company to public at large. Indirect Financing- It occurs when a financial intermediary is included to borrow funds. The company pays intermediary interest and the intermediary pays interest to investors.

3. The money market deals in short term debt while the capital market deals in long term investing in bonds and stocks. The money market is less risky than the capital market while the capital market is potentially more rewarding. The instruments used in the money markets include commercial deposits, collateral loans, acceptances, and bills of exchange. Institutions operating in the money markets include the Federal Reserve, commercial banks, and acceptance houses. Whereas the instruments used in capital markets are bonds, shares. The major parties are financial institutions, general public, brokers and dealers and corporations.

4. A dealer’s market is an arrangement in which dealers in the market post prices (ask and bid) for a specific security or share. A dealer puts his own capital to provide liquidity to investors. In an auction market the buyers and sellers post their prices at the same time. The current price is the highest bid the buyer is willing to pay and the lowest ask(offer price) the seller is willing to accept. The orders are matched and executed accordingly.

5. Toronto Stock Exchange (TSX) is the largest auction market in Canada.