Chapter 4: Learning Objectives

2. Chapter 4:Learning Objectives • Characteristics of Financial Market Instruments: • Money Market Instruments • Capital Market Instruments • Financial Innovations

3. Money Market Instruments • Short-term, low risk financial instruments • Bankers' Acceptance • Certificates of Deposit (CDs) • Commercial Paper • Treasury Bills (T-bills)

5. 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 The Money Market (most important)

6. Bank of Canada Advances

7. 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*=(BRt+Rtsb)/2

8. Special Purchase and Resale Agreements(SPRA)FIG4.2 Bankers’ AcceptancesFIG 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. The Money Market (cont’d)

9. Financing Through an SPRA Investment Dealer Bank of Canada Assets Liabilities Call loan Bank deposit T-bill SPRA Bank Call loan BOC Dep.

10. Financing via a Banker’s Acceptance Importer Exporter Letter of credit issued “Stamped” BANKS Secondary Market Rediscounting Investment Dealers Investors

11. 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 The Money Market (cont’d)

12. 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]

13. 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: The Money Market (cont’d) LVTSi + LVTSj = 0

14. Govt of Canada bonds Large secondary market principal source of debt finance across the term structure The Capital Market & Derivatives(most important)

15. Main Groups Holding Government Debt

16. 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 The Capital Market & Derivatives(most important)

17. Net New Issues of Stocks and Bonds

18. 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 The Capital Market & Derivatives(most important)

19. 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