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Learning Objectives

This text explores the primary and secondary participants in capital markets, the Canadian economy's allocation of funds among sectors, and the competition for funds in capital markets by corporations and governments. It also discusses government securities, including T-bills, long-term bonds, and Canadian Savings Bonds, as well as provincial, municipal, and corporate securities.

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Learning Objectives

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  1. Learning Objectives • Define primary, secondary, money and capital markets. (LO1) • Outline the primary participants raising funds in the capital markets. (LO2) • Characterize the Canadian economy as three major sectors allocating funds amongst themselves. (LO3)

  2. LO2 Competition for Funds in the Capital Markets • Corporations are not the only demander for funds in the capital markets. • All levels of governments also compete for funds in the capital markets.

  3. LO2 Government Securities • Government of Canada Securities • T-bills: short-term securities • Long-term bonds: active secondary market • Canadian Savings Bonds: illiquid long-term bonds • After 1998, the federal budget surpluses reduce demand for new debt and amount of debt outstanding. • Provincial and Municipal Government Bonds • Historically, provinces have borrowed mainly long term but during the 1990s became active in the short-term market as well. • Provinces and municipalities borrow actively in the foreign markets • Municipal bonds account for a small portion of the bond market

  4. LO2 Corporate Securities Corporate Bonds • most widely used form of financing in recent years • significant amounts raised abroad Preferred Stock • least used of all long-term corporate securities Common Stock • 25% of net new financings in some years • more equity is being raised abroad by Canadian corporations

  5. LO2 Figure 14-6Net new corporate financings by type of security Source: Reprinted with permission of Bank of Canada, “Banking and Financial Statistics”, F9 series.

  6. LO2 Corporate Financing in General • Debt-to-equity ratiosamong Canadian non-financial private corporations from the 1960s are fluctuating. • Managers attempt to time their issues of common stock. • Over a recent period, internally generated funds, consisting of retained earningsand capital consumption allowancegenerated over 60% of the firm’s funding needs. • Managers are reluctant to use external financing.

  7. LO2 Figure 14-7Debt-to-equity ratios for nonfinancial private corporations Source: Adapted from Statistics Canada, “Financial Statistics for Enterprises”, Catalogue No. 61-008, 2011.

  8. LO2 Figure 14-8Funding Sources of Non-financial Private Corporations Source: Statistics Canada, 61-008-, 2011, Table 3-2.

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