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Lecture 3

BUSI 3410U Lecture Notes - Lecture 3: U.S. Route 360, Money Market, United States Treasury Security

Course Code
BUSI 3410U
Bin Chang

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Lecture 3: The Money Market
Financial Institutions
Moe Maket → Moe ue is ot atuall taded i the oe aket
- Securities in the money market are short term with high liquidity
- Money market securities are usually sold in large denominations ($1,000,000 or more)
- They have low default risk
- They mature in one year or less from their issue date
- Banking industry should handle the needs for short-term loans and accept short term deposits
- Banks also have information on the credit-worthiness of participants
- Banks do mediate between savers and borrowers; heavily regulated
o Creates distinct cost advantages for money markets over banks
- Cost adatages → esee euieets eate additio epeses fo aks that oe akets do ot
o Regulations on the level of interest banks could offer depositors lead to a significant grown in money
markets; 70s and 80s
o When interest rates rose, depositors moved their money from banks to money markets to earn a
higher interest rate
- Pupose of Moe Maket → these ae aketale and highly liquid which means they can be converted to
money ( cash) at full value very quickly: they have high moneyness
o Demand comes from big institutions and corporations who have excess cash or are reluctant to
invest LT (Short terms are considered safe investments)
o Supply comes from major financial institutions who see it as a low cost source of funds
History of Money Market
- Before 1934 there was no Canadian money market
o Call loans went to NY or London
o Call loas→ loas ade  aks hee the an get repaid instantly (next day) to meet cash needs
o Sept 20,1031, Great Britain went off the gold standard and the pound sterling was no longer
convertible into gold
o Other countries followed and soon most currencies were floating rather than fixed
o Canada has no way of intervening in the FX market to affect value of CAD
- 1934 Macmillan Report recommended establishing
o Central bank, Canadian Money Market, Treasury bill auctions
- Participants in Money Markets
o Got of Caada, BOC, Coeial Baks, Businesses, Investment and Securities Firms. Individuals
(mostly through MM mutual funds)
Money Market Instruments
- Features
o Poisso Note→ eae ote: ho has the ote a peset it to the ak fo paet
Clean: no conditions just an unconditional promise
Usualy terms, 30,60, 90 days for corporates; flexible terms
Very large sums of money usually $ millions
Sold for less (discount) than face value
iteest is eaed  uig the at a disout ad gettig paid full fae alue
o The money market is a wholesale market dominated by large sophisticated institutions trading large
sums of money
o GECCs otes ae guaateed  its U“ paet Geeal Eleti
Like a parent co-signing a student loan
- Discounting; yield (K) or interest rate (US 360 days, Canada is 365 or exact)
- = (F P)/P ; for specific notes (different maturity)
K times (365/maturity day)
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Lecture 3: The Money Market
Financial Institutions
o BOC shows US rates
o Called money market Yield convention; bonds are quoted differently basis
o Basis points is 1/100 of a percentage point
- Tbills→ “hot te otes issued fo the teasu of a goeet age
o Fedeal got tills, poiial tills Otaio ad Quee
o Main issues are1m,3m,6m, 12m maturities
o Maturities are issued to ensure liquidity in theses benchmarks
o Issued at auction on Thursdays through sealed bids from registered securities distributors or deals
o Tills ae issued  Depatet of Fiae ad the autio is aaged  BOC as gots fisal aget
o Primary dealers of tbills
BMO, CIBC, Deutsche HSBC, Laurentian, Merill lynch, National, RBC, Scotia, TD
o Got seuities distiutos → applies to those iddes eligile to patiipate dietl i the tede
May be designated a primary dealer when:
Its calculated bidding limit reaches a threshold level of 10% based on its primary and
secondary market shares and buy back activity
It has provided evidence of sufficient resources and the desire to participate actively
in the market-marketing activity of GOC securities to the satisfaction of the
Department of Finance and the BOC
o Pia deales → desigates a sugoup of got seuities distiutos ho atiit is aoe a
certain threshold and who meet specific criteria
o TBill Autios → authoised deales o aoe ith BOC id idetifiatio ue BIN a suit
bids through an authorised dealer
o Each dealer has bidding limit to prevent market manipulation (Salomon Brothers, US)
Primary dealers are limited to 25% for themselves and 25% for customer with BIN to a max
of 40% total
Other dealers have a limit of 10%
BOC submits a bid for its own purchases
o Non-Copetitie → aepted i full o po-rated up to dealer and customer limits at an average yield
Investors only state the amount they want
The price is set as the weighted average of the competitive bids accepted
o Copetitie ids→ tes of isig ields hee eah deale a suit up to 7 ids fo a iiu
of $100,000 in multiples of $1,000
Distributors state both the amount of securities desired and the price they are willing to pay
BOC accepts the bids offering the highest price and makes the awards
Highest bidder is satisfied first, subsequent bidders are satisfied in the order of their bid
amount until the total amount of securities is distributed
Note: not everyone at the auction pays the same price for securities
o Salomo sadal → i U“, o oe dealer is allowed to purchase more than 35% of any one issue
1991, purchased 35% of Tbill in its own name, and bought addition securities in names of
customers without their knowledge or consent
May 1991, the brokerage managed to gain control of 94% of an 11 billion issue
Jo Gutfeud, fis haia etied
o Canadian Depository for Securities (CDS)
All payments through CDS, transfers are book entries on CDS computer system
Tbill purchases and sales are then made through a dealer with access to the debt clearing
service offered by CDS
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