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BUSI 3410U (20)
Bin Chang (14)
Lecture 3

BUSI 3410U Lecture 3: Lecture 3

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BUSI 3410U
Bin Chang

Lecture 3: The Money Market Financial Institutions Money Market Money (currency) is not actually traded in the money market 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 shortterm loans and accept short term deposits Banks also have information on the creditworthiness of participants Banks do mediate between savers and borrowers; heavily regulated o Creates distinct cost advantages for money markets over banks Cost advantages reserve requirements create addition expenses for banks that money markets do not have 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 Purpose of Money Market these are marketable 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 loans loans made by banks where they can 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 Govt of Canada, BOC, Commercial Banks, Businesses, Investment and Securities Firms. Individuals (mostly through MM mutual funds) Money Market Instruments Features o Promissory Note bearer note: who has the note can present it to the bank for payment 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 interest is earned by buying them at a discount and getting paid full face value o The money market is a wholesale market dominated by large sophisticated institutions trading large sums of money o GECCs notes are guaranteed by its US parent General Electric Like a parent cosigning 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 (365maturity day)
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