Chapter 4: Learning Objectives

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Chapter 4Learning Objectives

• Characteristics of Financial Market Instruments
• Money Market Instruments
• Capital Market Instruments
• Financial Innovations

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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

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Bank of Canada Advances
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The Operating Band for the Overnight Market
Overnight Market Rates
Bank Rate
OPERATING BAND
BOC target rate mid-point of range
Rate on ve balances Bank rate less 0.50
Overdraft
Surplus
ON(BRtRtsb)/2
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The Money Market (contd)

• 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
Assets
Liabilities
Call loan
Bank deposit
T-bill
SPRA
Bank
Call loan
BOC Dep.
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Financing via a Bankers Acceptance
Importer
Exporter
Letter of credit issued
Stamped
BANKS
Secondary Market
Investment Dealers
Rediscounting
Investors
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The Money Market (contd)

• 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 intl int rate developments

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The Money Market contd

• 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

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The Money Market (contd)

• Special Purchase and Resale Agreements (SPRA)
  FIG4.2 (contd)

• If participant is LVTS is LVTSi while
  participant js 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
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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
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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.

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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
  Tbills, Bank of Canada Advances, SPRAs, Bankers
  Acceptances, interbank deposits and the
  Eurocurrency market
• The principal capital market instruments are Govt
  bonds, stocks and derivative products