Copyright (c) 2006 McGraw-Hill Ryerson Limited
Copyright (c) 2006 McGraw-Hill Ryerson Limited. Chapter 4: Learning Objectives Characteristics of Financial Market Instruments: Money Market Instruments.
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Copyright (c) 2006 McGraw-Hill Ryerson Limited
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Chapter 4:Learning Objectives
Characteristics of Financial Market Instruments: Money Market Instruments Capital Market Instruments
Financial Innovations
Money Market Instruments
Short-term, low risk financial instruments Bankers' Acceptance Certificates of Deposit (CDs) Commercial Paper Treasury Bills (T-bills)
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Money Market (most important)
Treasury Bills
Bank of Canada Advances
Mature 91-365 days issued by the Federal Govt large secondary market rate fluctuates according
to overnight market band useful indicator of
monetary policy stance
“lender of last resort” loan access by CPA members Actively discouraged
source of borrowing
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Bank of Canada Advances
0
1000
2000
3000
4000
198519871989 19911993199519971999 20012003
3469.0
868.0
798.0
484.9
312.0
471.0
1174.0
224.0
131.0
447.0
545.0 554.0
363.0
656.0
560.9
952.0
647.0
535.0
383.0
10.0
Mill
ions
of d
olla
rs
3469
868 798
485312
471
1174
224
131
447545554
363656
561
952
647535
383
10
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Operating Band for the Overnight Market
OvernightMarket Rates
Bank Rate
Rate on +ve balances =Bank rate less 0.50%
OPERATING BAND
BOC target rate = mid-pointof range
Overdraft Surplus
ON*=(BRt+Rtsb)/2
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Money Market (cont’d)
Special Purchase and Resale Agreements(SPRA) FIG4.2
Bankers’ Acceptances FIG 4.3
Short-term loan used by BOC to affect liquidity in fin. mkts.
Can be implemented at short notice and has been used more frequently of late.
Widely used as a method of high quality short-term finance
large and active secondary mkt.
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Financing Through an SPRA
Investment Dealer Bank of Canada
Bank
SPRA T-bill Bank deposit
Call loan
BOC Dep.
Assets Liabilities
Call loan
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Financing via a Banker’s Acceptance
Importer Exporter
BANKS
Investment Dealers
Investors
Letter of creditissued
Secondary Market
Rediscounting
“Stamped”
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Money Market (cont’d)
Interbank deposits
Eurocurrency instruments
growth reflects globalization and importance of interbank transactions
useful as a cash management tool
offshore financial market in several centers (London UK most important)
highly liquid, low tax and transactions costs
useful guide for int’l int rate developments
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Money Market [cont’d]
The Large Value Transfer System (LVTS) Assists in the operations of the clearing
system Attempting to reduce systemic risk Not, strictly speaking, an instrument Created by the CPA (Canadian payments
Association]
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Money Market (cont’d)
Special Purchase and Resale Agreements (SPRA) FIG4.2 (cont’d)
If participant i’s LVTS is LVTSi while participant j’s LVTS balance are LVTSj then we would expect:
LVTSi + LVTSj = 0
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The Capital Market & Derivatives(most important)
Govt of Canada bonds
Large secondary market principal source of debt
finance across the term structure
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Main Groups Holding Government Debt
0
10
20
30
40
50
60
70
80
90
1987 1990 1993 1996 1999 2002
Bank of CanadaNonresidentsCanadian residetnsP
erce
nt
Year
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Capital Market & Derivatives(most important)
Govt of Canada bonds
Stocks
Large secondary market principal source of debt
finance across the term structure
newly issued and large secondary market
private source of debt
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Net New Issues of Stocks and Bonds
0
1000
2000
3000
4000
5000
6000
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Millio
ns
of d
olla
rs (par va
lue)
Year
Stocks
Bonds
Copyright (c) 2006 McGraw-Hill Ryerson Limited
The Capital Market & Derivatives(most important)
Govt of Canada bonds
Stocks
Derivatives
large secondary market principal source of debt
finance across the term structure
newly issued and large secondary market
private source of debt
large variety can be a source of reduced
or increased risk
Copyright (c) 2006 McGraw-Hill Ryerson Limited
Summary
Financial Markets can be subdivided into the Money and Capital Markets
Money Market instruments are short-term in nature Capital Market instruments are long-term in nature The principal Money market instruments are T-bills,
Bank of Canada Advances, SPRAs, Banker’s Acceptances, interbank deposits and the Eurocurrency market
The principal capital market instruments are Govt bonds, stocks and derivative products
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