SOLUTION MANUAL FORg g
FundamentalsgOfgCorporategFinanceg11cegStephengA.gRoss,gRandolphgW.gWesterfield,gB
radfordgD.gJordan,gJ.gArigPandes,gThomasgHolloway
Chapterg1-26
CHAPTERg1
INTRODUCTIONgTOgCORPORATEgFINANCE
LearninggObjectives
LO1g Thegbasicgtypesgofgfinancialgmanagementgdecisionsgandgthegrolegofgthegfinancialgmanager.
LO2g Thegfinancialgimplicationsgofgthegdifferentgformsgofgbusinessgorganization.
LO3g Theggoalgofgfinancialgmanagement.
LO4g Thegconflictsgofginterestsgthatgcangarisegbetweengmanagersgandgowners.
LO5g Thegrolesgofgfinancialginstitutionsgandgmarkets.
LO6g Typesgofgfinancialginstitutions.
LO7g Trendsgingfinancialgmarkets.
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. (LO1)gCapitalgbudgetingg(decidinggongwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg
(decidinggwhethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkin
ggcapitalgmanagementg(modifyinggthegfirm‘sgcreditgcollectiongpolicygwithgitsgcustomers).g(LO1)
2. (LO2)gDisadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,ghardgtog
raisegcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers.
3. (LO2)gThegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdi
stributedgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability,
gabilitygtograisegcapital,gunlimitedglife,gandgsogforth.
4. (LO4)gThegtreasurer‘sgofficegandgthegcontroller‘sgofficegaregthegtwogprimarygorganizationalggroupsgt
hatgreportgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller‘sgofficeghandlesgcostgandgfinancialga
ccounting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer‘sgofficegisgr
esponsiblegforgcashgandgcreditgmanagement,gcapitalgbudgeting,gandgfinancialgplanning.gTherefore,gt
hegstudygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup‘sgfunctions.
5. (LO3)gTogmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit‘sg
publicly-tradedgorgnot).
6. (LO4)gIngthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegshare
holdersgelectgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm‘sgmanagement.gThisgsep
arationgofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagencygpro
blemsgtogexist.gManagementgmaygactgingitsgowngorgsomeonegelse‘sgbestginterests,grathergthangthoseg
ofgthegshareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggthegsharegpri
cegofgthegequitygofgthegfirm.
7. (LO5)gAgprimarygmarketgtransaction.gAgsecondarygmarketgtransactiongwouldgentailgthegsalegbetwee
ngtwog3rdgpartiesg(i.e.gnotgthegcorporation).
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-1
,8. (LO5)gIngauctiongmarketsglikegthegTorontogStockgExchangeg(TSX),gbrokersgandgagentsgmeetgatgagc
entralglocationg(thegexchange)gtogmatchgbuyersgandgsellersgofgassets.gPhysicalglocationsgforgstockgm
arketsgaregdisappearinggasgtradinggbecomesgmoregelectronic.gDealergmarketsglikegNasdaqgconsistgofg
dealersgoperatinggatgdispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgoth
ergdealersgeithergelectronicallygorgliterallygover-the-
counter.gDealergmarketsgareglessgtransparentgthangauctiongmarketsgwheregtradesgaregreportedgpublicl
ygalmostgimmediately.g ThegauctiongmarketgrungbygthegTSXgisgwheregthegstocksgofglargergCanadian
gcompaniesgaregtraded;gthegTSXgalsogoperatesgagdealergmarketgcalledgthegVenturegExchangegforgco
mpaniesgtoog smallgtogqualifygforgthegTSXgauctiong exchange.
9. (LO3)gSuchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgar
egconceivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gi.e.,gprovidegwhateverggoodsga
ndgservicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAnothergwouldgbegtogbestgservegtheg
maximumgpossiblegnumbergofgstakeholdersgatgtheglowestgcost.gAgbettergapproachgmightgbegtogobser
vegthatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisgtogmaximizegthegvalueg
ofgthegequity.
10. (LO3)gPresumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegca
shgflows,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
11. (LO3)gAngargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarket
geconomy,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgan
d/orgillegalgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegotherge
xtreme,gwegcouldgarguegthatgthesegaregnon-
economicgphenomenagandgaregbestghandledgthroughgthegpoliticalgprocess.gAgclassicg(andghighlygrele
vant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomethingglikegthis:g―Agfirmghasgestimated
gthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$30gmillion.gHowever,gthegfirmgbeli
evesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20g milliongingproductgliabilitygclaims
gandglostgcustomerggoodwill.gWhatgshouldgthegfirmgdo?‖
12. (LO3)gTheggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentg
becausegofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
13. (LO4)gTheggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholder
s.gIfgmanagementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegw
illgexceedg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbelieves
gthatgthisgbiddergorgother gunidentified gbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogacquire
gthegcompany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementgcannotgin
creasegthegvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gthengmanage
mentgisgnotgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcurrentgmanagers
goftenglosegtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmanagersghavegangincenti
vegtogfightg corporategtakeoversgingsituationsgsuchgasgthis.
14. (LO4)gWegwouldgexpectgagencygproblemsgtogbeglessgseveregingothergcountries,gprimarilygduegtogth
egrelativelygsmallgpercentagegofgindividualgownership.gFewergindividualgownersgmeansgthatgeachgin
dividualgownerghasgaggreatergincentivegtogmonitorgandgcontrolgthegfirm—i.e.gtheregisglessgfree-
riding.gTheghighgpercentagegofginstitutionalgownershipgmightgleadgtogaghighergdegreegofgagreementg
betweengownersgandgmanagersgongdecisionsgconcerninggriskygprojects.gIngaddition,ginstitutionsgmay
gbegbettergablegtogimplementgeffectivegmonitoringgmechanismsgongmanagersgthangcangindividualgow
ners,gbasedgongtheginstitutions‘gdeepergresourcesgandgexperiencesgwithgtheirgowngmanagement.gTheg
increaseginginstitutionalgownershipgofgstockgingCanadagandgingthegUnitedgStatesgandgtheggrowinggac
tivismgofgtheseglargegshareholderggroupsgmaygleadgtogagreductiongingagencygproblemsgforgCanadian
gandgU.S.gcorporationsgandgagmoregefficientgmarketgforgcorporategcontrol.
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-2
,15. (LO5)gMajorginstitutions:
Charteredgbanksg-
acceptgdepositsgandgissuegcommercialgloans,gcorporategloans,gpersonalgloansgandgmortgages.
Trustgcompanies-
acceptgdepositsgandgmakegloans,gbutgalsogengagegingfiduciarygactivitiesgsuchgasgmanaginggassetsgfor
gestates,gregistered gretirementgsavingsgplans,getc.
Investmentgdealersg-non-depositoryginstitutionsgthatgassistgfirmsgingissuinggnewgsecurities.
Insurancegcompaniesg-
engagegingindirectgfinancinggbygacceptinggfundsgingagformgsimilargtogagdepositgandgmakinggloans.
Pensiongfundsg-
investgcontributionsgfromgemployersgandgemployeesgingsecuritiesgofferedgbygfinancialgmarkets.
Mutualgfundsg-poolgindividualginvestmentsgtogpurchasegagdiversifiedgportfolio.
Hedgegfundsg-
catergtogsophisticatedginvestorsgandgseekghighgreturnsgbygusinggaggressivegfinancialgstrategiesgprohi
bitedgbygmutualgfunds.
Notegthatglargergfinancialginstitutionsgmaygembodygmanygofgthesegdifferentginstitution.gForgexample
,gCIBCgisgagcharteredgbankgthatgownsganginvestmentgdealergandgmutualgfunds.gFurthermore,gitghasga
nginsurancegarmg―CIBCgInsurance‖
Majorgmarkets:
Moneygmarketg-financialgmarketsgwheregshort-termgdebtginstrumentsgaregboughtgandgsold.
Capitalgmarketsg-financialgmarketsgwhereglong-
termgdebtgandgequitygsecuritiesgaregboughtgandgsold.gDerivativesgmarketsg–
gwheregoptionsgandgfuturesgaregtraded gongfinancialginstrumentsgandgcommoditiesgPrimaryg marketsg
areg whereg securitiesg areg soldg forg theg firstg time;g secondaryg marketsg areg wheregoutstandinggsec
uritiesgtrade.
16. (LO5)gSpreadgversusgFeegIncome:
Banksgearngspreadgorginterestgincomegbygborrowinggfromgdepositorsgandglendinggtogborrowersg(atgaghigh
ergyield).gAngexamplegisgagretailgdepositgandgagmortgage.gBanksgmakegnon-
interestgorgfeegincomegwhengtheygchargegcommissionsgorgfeesgforgservices.gAngexamplegisgangoverdraftgf
eegorgATMgfee,gorgthegexamplegingthegtext,gthegstampinggfeegongagbanker‘sgacceptanceg(whichgisgagformg
ofginsurancegandgarranginggfee).
17. (LO5)gTrends:
Financialgengineeringg-
thegcreationgofgnewgsecuritiesgorgfinancialgprocesses.gThisgengineeringgcouldgbegusedgtogpackagegan
dgsellgriskygassetsgtoginvestors;gforgexample,gbanksgcangpackagegandgsellgmortgagesgintogmortgageg
backedgsecuritiesgandgsellgthesegongtogotherginvestors.
Derivativegsecuritiesg-
options,gfutures,gforwards,gandgothergsecuritiesgwhosegvaluegisgderivedgfromgthegpricegofganother,gu
nderlyinggasset.g Forgexample,gagfuturesgcontractgtogpurchasegoilgsetsgagfixedgpurchase/sellinggpriceg
forgagfuturegdate,gbutgitsgvaluegdependsgongthegpricegofgoil.gThesegderivativesgcanghelpgbusinessesgd
ivestgrisksgthatgaregnotgcoregtogtheirgbusiness,gsuchgasgforeigngexchangegandginputgpriceg(likegoil)gri
sk.
Regulatorygdialecticg-
thegpressuresgthatgfinancialginstitutionsgandgregulatorygbodiesgexertgongeachg other.g Forgexample,gw
hengrestrictionsgaregremoved,ggrowthgopportunitiesgmaygincrease.g However,gthegabsencegofgregulato
rygrestrictionsgmaygalsogleadgtogproblemsgsuchgasgthegglobalgfinancialgcrisisgstartingging2007gcaused
gbygexcessivegfinancialgleverage,gsogitgisgimportantgthatgtheregbegangappropriateglevelgofgregulatoryg
oversight.
ESGg–
Investorsgandgcorporationsg(andgtheirgmanygstakeholders)garegincreasinglygfocusedgongEnvironmenta
l,gSocietal,gandgGovernancegissues.gThisgincludesgemployeegandgcustomergwelfaregasgwellgasgclimat
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-3
, egchangegandgpollution.
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-4
FundamentalsgOfgCorporategFinanceg11cegStephengA.gRoss,gRandolphgW.gWesterfield,gB
radfordgD.gJordan,gJ.gArigPandes,gThomasgHolloway
Chapterg1-26
CHAPTERg1
INTRODUCTIONgTOgCORPORATEgFINANCE
LearninggObjectives
LO1g Thegbasicgtypesgofgfinancialgmanagementgdecisionsgandgthegrolegofgthegfinancialgmanager.
LO2g Thegfinancialgimplicationsgofgthegdifferentgformsgofgbusinessgorganization.
LO3g Theggoalgofgfinancialgmanagement.
LO4g Thegconflictsgofginterestsgthatgcangarisegbetweengmanagersgandgowners.
LO5g Thegrolesgofgfinancialginstitutionsgandgmarkets.
LO6g Typesgofgfinancialginstitutions.
LO7g Trendsgingfinancialgmarkets.
AnswersgtogConceptsgReviewgandgCriticalgThinkinggQuestions
1. (LO1)gCapitalgbudgetingg(decidinggongwhethergtogexpandgagmanufacturinggplant),gcapitalgstructureg
(decidinggwhethergtogissuegnewgequitygandgusegthegproceedsgtogretiregoutstandinggdebt),gandgworkin
ggcapitalgmanagementg(modifyinggthegfirm‘sgcreditgcollectiongpolicygwithgitsgcustomers).g(LO1)
2. (LO2)gDisadvantages:gunlimitedgliability,glimitedglife,gdifficultygingtransferringgownership,ghardgtog
raisegcapitalgfunds.gSomegadvantages:gsimpler,glessgregulation,gthegownersgaregalsogthegmanagers.
3. (LO2)gThegprimarygdisadvantagegofgthegcorporategformgisgthegdoublegtaxationgtogshareholdersgofgdi
stributedgearningsgandgdividends.gSomegadvantagesginclude:glimitedgliability,geasegofgtransferability,
gabilitygtograisegcapital,gunlimitedglife,gandgsogforth.
4. (LO4)gThegtreasurer‘sgofficegandgthegcontroller‘sgofficegaregthegtwogprimarygorganizationalggroupsgt
hatgreportgdirectlygtogthegchiefgfinancialgofficer.gThegcontroller‘sgofficeghandlesgcostgandgfinancialga
ccounting,gtaxgmanagement,gandgmanagementginformationgsystems,gwhilegthegtreasurer‘sgofficegisgr
esponsiblegforgcashgandgcreditgmanagement,gcapitalgbudgeting,gandgfinancialgplanning.gTherefore,gt
hegstudygofgcorporategfinancegisgconcentratedgwithingthegtreasuryggroup‘sgfunctions.
5. (LO3)gTogmaximizegthegcurrentgmarketgvalueg(sharegprice)gofgthegequitygofgthegfirmg(whethergit‘sg
publicly-tradedgorgnot).
6. (LO4)gIngthegcorporategformgofgownership,gthegshareholdersgaregthegownersgofgthegfirm.gThegshare
holdersgelectgthegdirectorsgofgthegcorporation,gwhogingturngappointgthegfirm‘sgmanagement.gThisgsep
arationgofgownershipgfromgcontrolgingthegcorporategformgofgorganizationgisgwhatgcausesgagencygpro
blemsgtogexist.gManagementgmaygactgingitsgowngorgsomeonegelse‘sgbestginterests,grathergthangthoseg
ofgthegshareholders.gIfgsuchgeventsgoccur,gtheygmaygcontradictgtheggoalgofgmaximizinggthegsharegpri
cegofgthegequitygofgthegfirm.
7. (LO5)gAgprimarygmarketgtransaction.gAgsecondarygmarketgtransactiongwouldgentailgthegsalegbetwee
ngtwog3rdgpartiesg(i.e.gnotgthegcorporation).
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-1
,8. (LO5)gIngauctiongmarketsglikegthegTorontogStockgExchangeg(TSX),gbrokersgandgagentsgmeetgatgagc
entralglocationg(thegexchange)gtogmatchgbuyersgandgsellersgofgassets.gPhysicalglocationsgforgstockgm
arketsgaregdisappearinggasgtradinggbecomesgmoregelectronic.gDealergmarketsglikegNasdaqgconsistgofg
dealersgoperatinggatgdispersedglocalesgwhogbuygandgsellgassetsgthemselves,gcommunicatinggwithgoth
ergdealersgeithergelectronicallygorgliterallygover-the-
counter.gDealergmarketsgareglessgtransparentgthangauctiongmarketsgwheregtradesgaregreportedgpublicl
ygalmostgimmediately.g ThegauctiongmarketgrungbygthegTSXgisgwheregthegstocksgofglargergCanadian
gcompaniesgaregtraded;gthegTSXgalsogoperatesgagdealergmarketgcalledgthegVenturegExchangegforgco
mpaniesgtoog smallgtogqualifygforgthegTSXgauctiong exchange.
9. (LO3)gSuchgorganizationsgfrequentlygpursuegsocialgorgpoliticalgmissions,gsogmanygdifferentggoalsgar
egconceivable.gOneggoalgthatgisgoftengcitedgisgrevenuegminimization;gi.e.,gprovidegwhateverggoodsga
ndgservicesgaregofferedgatgtheglowestgpossiblegcostgtogsociety.gAnothergwouldgbegtogbestgservegtheg
maximumgpossiblegnumbergofgstakeholdersgatgtheglowestgcost.gAgbettergapproachgmightgbegtogobser
vegthatgevengagnot-for-
profitgbusinessghasgequity.gThus,goneganswergisgthatgthegappropriateggoalgisgtogmaximizegthegvalueg
ofgthegequity.
10. (LO3)gPresumably,gthegcurrentgstockgvaluegreflectsgthegrisk,gtiming,gandgmagnitudegofgallgfuturegca
shgflows,gbothgshort-termgandglong-term.gIfgthisgisgcorrect,gthengthegstatementgisgfalse.
11. (LO3)gAngargumentgcangbegmadegeithergway.gAtgthegonegextreme,gwegcouldgarguegthatgingagmarket
geconomy,gallgofgthesegthingsgaregpriced.gTheregisgthusgangoptimalglevelgof,gforgexample,gethicalgan
d/orgillegalgbehavior,gandgthegframeworkgofgstockgvaluationgexplicitlygincludesgthese.gAtgthegotherge
xtreme,gwegcouldgarguegthatgthesegaregnon-
economicgphenomenagandgaregbestghandledgthroughgthegpoliticalgprocess.gAgclassicg(andghighlygrele
vant)gthoughtgquestiongthatgillustratesgthisgdebateggoesgsomethingglikegthis:g―Agfirmghasgestimated
gthatgthegcostgofgimprovinggthegsafetygofgonegofgitsgproductsgisg$30gmillion.gHowever,gthegfirmgbeli
evesgthatgimprovinggthegsafetygofgthegproductgwillgonlygsaveg$20g milliongingproductgliabilitygclaims
gandglostgcustomerggoodwill.gWhatgshouldgthegfirmgdo?‖
12. (LO3)gTheggoalgwillgbegthegsame,gbutgthegbestgcoursegofgactiongtowardgthatggoalgmaygbegdifferentg
becausegofgdifferinggsocial,gpolitical,gandgeconomicginstitutions.
13. (LO4)gTheggoalgofgmanagementgshouldgbegtogmaximizegthegsharegpricegforgthegcurrentgshareholder
s.gIfgmanagementgbelievesgthatgitgcangimprovegthegprofitabilitygofgthegfirmgsogthatgthegsharegpricegw
illgexceedg$35,gthengtheygshouldgfightgthegoffergfromgthegoutsidegcompany.gIfgmanagementgbelieves
gthatgthisgbiddergorgother gunidentified gbiddersgwillgactuallygpaygmoregthang$35gpergsharegtogacquire
gthegcompany,gthengtheygshouldgstillgfightgthegoffer.gHowever,gifgthegcurrentgmanagementgcannotgin
creasegthegvaluegofgthegfirmgbeyondgthegbidgprice,gandgnogotherghighergbidsgcomegin,gthengmanage
mentgisgnotgactinggingtheginterestsgofgthegshareholdersgbygfightinggthegoffer.gSincegcurrentgmanagers
goftenglosegtheirgjobsgwhengthegcorporationgisgacquired,gpoorlygmonitoredgmanagersghavegangincenti
vegtogfightg corporategtakeoversgingsituationsgsuchgasgthis.
14. (LO4)gWegwouldgexpectgagencygproblemsgtogbeglessgseveregingothergcountries,gprimarilygduegtogth
egrelativelygsmallgpercentagegofgindividualgownership.gFewergindividualgownersgmeansgthatgeachgin
dividualgownerghasgaggreatergincentivegtogmonitorgandgcontrolgthegfirm—i.e.gtheregisglessgfree-
riding.gTheghighgpercentagegofginstitutionalgownershipgmightgleadgtogaghighergdegreegofgagreementg
betweengownersgandgmanagersgongdecisionsgconcerninggriskygprojects.gIngaddition,ginstitutionsgmay
gbegbettergablegtogimplementgeffectivegmonitoringgmechanismsgongmanagersgthangcangindividualgow
ners,gbasedgongtheginstitutions‘gdeepergresourcesgandgexperiencesgwithgtheirgowngmanagement.gTheg
increaseginginstitutionalgownershipgofgstockgingCanadagandgingthegUnitedgStatesgandgtheggrowinggac
tivismgofgtheseglargegshareholderggroupsgmaygleadgtogagreductiongingagencygproblemsgforgCanadian
gandgU.S.gcorporationsgandgagmoregefficientgmarketgforgcorporategcontrol.
Rossgetgal,gFundamentalsgofgCorporategFinanceg11thgCanadiangEditiongSolutionsgMan
ual
©g2022gMcGraw-HillgEducationgLtd.
7-2
,15. (LO5)gMajorginstitutions:
Charteredgbanksg-
acceptgdepositsgandgissuegcommercialgloans,gcorporategloans,gpersonalgloansgandgmortgages.
Trustgcompanies-
acceptgdepositsgandgmakegloans,gbutgalsogengagegingfiduciarygactivitiesgsuchgasgmanaginggassetsgfor
gestates,gregistered gretirementgsavingsgplans,getc.
Investmentgdealersg-non-depositoryginstitutionsgthatgassistgfirmsgingissuinggnewgsecurities.
Insurancegcompaniesg-
engagegingindirectgfinancinggbygacceptinggfundsgingagformgsimilargtogagdepositgandgmakinggloans.
Pensiongfundsg-
investgcontributionsgfromgemployersgandgemployeesgingsecuritiesgofferedgbygfinancialgmarkets.
Mutualgfundsg-poolgindividualginvestmentsgtogpurchasegagdiversifiedgportfolio.
Hedgegfundsg-
catergtogsophisticatedginvestorsgandgseekghighgreturnsgbygusinggaggressivegfinancialgstrategiesgprohi
bitedgbygmutualgfunds.
Notegthatglargergfinancialginstitutionsgmaygembodygmanygofgthesegdifferentginstitution.gForgexample
,gCIBCgisgagcharteredgbankgthatgownsganginvestmentgdealergandgmutualgfunds.gFurthermore,gitghasga
nginsurancegarmg―CIBCgInsurance‖
Majorgmarkets:
Moneygmarketg-financialgmarketsgwheregshort-termgdebtginstrumentsgaregboughtgandgsold.
Capitalgmarketsg-financialgmarketsgwhereglong-
termgdebtgandgequitygsecuritiesgaregboughtgandgsold.gDerivativesgmarketsg–
gwheregoptionsgandgfuturesgaregtraded gongfinancialginstrumentsgandgcommoditiesgPrimaryg marketsg
areg whereg securitiesg areg soldg forg theg firstg time;g secondaryg marketsg areg wheregoutstandinggsec
uritiesgtrade.
16. (LO5)gSpreadgversusgFeegIncome:
Banksgearngspreadgorginterestgincomegbygborrowinggfromgdepositorsgandglendinggtogborrowersg(atgaghigh
ergyield).gAngexamplegisgagretailgdepositgandgagmortgage.gBanksgmakegnon-
interestgorgfeegincomegwhengtheygchargegcommissionsgorgfeesgforgservices.gAngexamplegisgangoverdraftgf
eegorgATMgfee,gorgthegexamplegingthegtext,gthegstampinggfeegongagbanker‘sgacceptanceg(whichgisgagformg
ofginsurancegandgarranginggfee).
17. (LO5)gTrends:
Financialgengineeringg-
thegcreationgofgnewgsecuritiesgorgfinancialgprocesses.gThisgengineeringgcouldgbegusedgtogpackagegan
dgsellgriskygassetsgtoginvestors;gforgexample,gbanksgcangpackagegandgsellgmortgagesgintogmortgageg
backedgsecuritiesgandgsellgthesegongtogotherginvestors.
Derivativegsecuritiesg-
options,gfutures,gforwards,gandgothergsecuritiesgwhosegvaluegisgderivedgfromgthegpricegofganother,gu
nderlyinggasset.g Forgexample,gagfuturesgcontractgtogpurchasegoilgsetsgagfixedgpurchase/sellinggpriceg
forgagfuturegdate,gbutgitsgvaluegdependsgongthegpricegofgoil.gThesegderivativesgcanghelpgbusinessesgd
ivestgrisksgthatgaregnotgcoregtogtheirgbusiness,gsuchgasgforeigngexchangegandginputgpriceg(likegoil)gri
sk.
Regulatorygdialecticg-
thegpressuresgthatgfinancialginstitutionsgandgregulatorygbodiesgexertgongeachg other.g Forgexample,gw
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