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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)

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chapter 4 learning objectives
Chapter 4:Learning Objectives
  • Characteristics of Financial Market Instruments:
    • Money Market Instruments
    • Capital Market Instruments
  • Financial Innovations
money market instruments
Money Market Instruments
  • Short-term, low risk financial instruments
    • Bankers' Acceptance
    • Certificates of Deposit (CDs)
    • Commercial Paper
    • Treasury Bills (T-bills)
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

The Money Market (most important)
the operating band for the overnight market
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

the money market cont d
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)
financing through an spra
Financing Through an SPRA

Investment Dealer

Bank of Canada

Assets

Liabilities

Call loan

Bank deposit

T-bill

SPRA

Bank

Call loan

BOC Dep.

financing via a banker s acceptance
Financing via a Banker’s Acceptance

Importer

Exporter

Letter of credit

issued

“Stamped”

BANKS

Secondary Market

Rediscounting

Investment Dealers

Investors

the money market cont d1
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)
the money market cont d2
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]
the money market cont d3
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

the capital market derivatives most important
Govt of Canada bonds

Large secondary market

principal source of debt finance across the term structure

The Capital Market & Derivatives(most important)
the capital market derivatives most important1
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)
the capital market derivatives most important2
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)
summary
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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